FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended ............. MARCH 31, 1999
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-26584
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FIRST WASHINGTON BANCORP, INC.
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(Exact name of registrant as specified in its charter)
WASHINGTON 91-1691604
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 S. FIRST AVENUE WALLA WALLA, WASHINGTON 99362
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(Address of principal executive offices and zip code)
(509) 527-3636
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if changed since last
report.)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK $.01 PAR VALUE PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent files pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to
this form 10-K. X
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The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of May 31, 1999:
COMMON STOCK - $224,478,399
The number of shares outstanding of the issuer's classes of common stock as of
May 31, 1999:
COMMON STOCK, $.01 PAR VALUE - 11,330,440 shares
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DOCUMENT INCORPORATED BY REFERENCE
PORTIONS OF PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS TO BE HELD JULY
23, 1999 ARE INCORPORATED BY REFERENCE INTO PART III.
FIRST WASHINGTON BANCORP, INC., AND SUBSIDIARIES
TABLE OF CONTENTS
PART I PAGE #
Item 1. Business .................................................. 3
General....................................................3
Acquisition and Mergers................................... 4
Adoption of Dividend Reinvestment and Stock Purchase Plan..5
Lending Activities........................................ 5
Asset Quality.............................................13
Allowance for Loan Losses.................................16
Investment Activities.....................................20
Deposit Activities and Other Sources of Funds.............26
Personnel.................................................28
Taxation..................................................28
Environmental Regulation..................................30
Competition...............................................30
Regulation................................................31
Management Personnel......................................36
Item 2. Properties.................................................37
Item 3. Legal Proceedings..........................................37
Item 4. Submission of Matters to a Vote of Security Holders .......37
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters................................38
Item 6. Selected Financial Data....................................39
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation........................41
Comparison of Results of Operations
March 31, 1999 vs. 1998.................................44
March 31, 1998 vs. 1997.................................47
Market Risk and Asset/ Liability Management..............52
Liquidity and Capital Resources..........................57
Capital Requirements.....................................58
Effect of Inflation and Changing Prices..................58
Recent Accounting Standards Not Yet Audited..............58
Item 8. Financial Statements and Supplementary Data................59
Item 9. Changes in and Disagreements with Accountant
on Accounting and Financial Disclosure.....................59
PART III
Item 10.Directors and Executive Officers of the Registrant.........59
Item 11.Executive Compensation.....................................59
Item 12.Security Ownership of Certain Beneficial Owners
and Management.............................................59
Item 13.Certain Relationships and Related Transactions.............59
PART IV
Item 14.Exhibits, Financial Statement Schedules, and
Reports on Form 8-K..................... .................62
SIGNATURES..........................................................61
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PART 1
ITEM 1 - BUSINESS
GENERAL
First Washington Bancorp, Inc. (the Company or FWWB), a Washington
corporation, is primarily engaged in the business of planning, directing and
coordinating the business activities of its wholly owned subsidiaries, First
Savings Bank of Washington (FSBW), Inland Empire Bank (IEB) and Towne Bank
(TB) (together, the Banks). FSBW is a Washington-chartered savings bank the
deposits of which are insured by the Federal Deposit Insurance Corporation
(FDIC) under the Savings Association Insurance Fund (SAIF). FSBW conducts
business from its main office in Walla Walla, Washington and its 16 branch
offices and three loan production offices located in southeast, central, north
central and western Washington. Effective January 1, 1999, FWWB completed the
acquisition of Whatcom State Bancorp whose wholly owned subsidiary, Whatcom
State Bank (WSB), was merged with FSBW and operates as Whatcom State Bank, a
Division of First Savings Bank of Washington. WSB, which is based in
Bellingham, operates five full service branches and a loan office in northwest
Washington. IEB is an Oregon-chartered commercial bank whose deposits are
insured by the FDIC under the Bank Insurance Fund (BIF). IEB conducts business
from its main office in Hermiston, Oregon and its five branch offices and two
loan production offices located in northeast Oregon. TB is a Washington-
chartered commercial bank whose deposits are insured by the FDIC under BIF. TB
conducts business from six full service branches in the Seattle, Washington,
metropolitan area. The Company's main office is located at 10 S. First Avenue,
Walla Walla, Washington 99362 and its telephone number is (509) 527-3636.
The operating results of the Company depend substantially on its net interest
income, which is the difference between interest income on interest-earning
assets, consisting of loans and securities, and interest expense on interest-
bearing liabilities, composed primarily of deposits and borrowings. Net
interest income is a function of the Company's interest rate spread, which is
the difference between the yield earned on interest-earning assets and the
rate paid on interest-bearing liabilities, as well as a function of the
average balance of interest-earning assets as compared to the average balance
of interest-bearing liabilities. The Company's net income also is affected by
provisions for loan losses and the level of its other income, including
deposit service charges, loan and servicing fees, and gains and losses on the
sale of loans and securities, as well as its non-interest operating expenses
and income tax provisions.
First Savings Bank of Washington is a community oriented savings bank which
has traditionally offered a wide variety of deposit products to its retail
customers while concentrating its lending activities on real estate loans.
Lending activities have been focused primarily on the origination of loans
secured by one-to four-family residential dwellings, including emphasis on
loans for construction of residential dwellings. To a lesser extent, lending
activities also have included the origination of multi-family, commercial real
estate and consumer loans. FSBW's primary business has been that of a
traditional thrift institution, originating loans for portfolio in its primary
market area. FSBW has also been an active participant in the secondary market,
originating residential loans for sale and on occasion acquiring loans for
portfolio. More recently, FSBW has begun making non-mortgage commercial and
agribusiness loans to small businesses and farmers. In addition to loans, FSBW
has maintained a significant portion of its assets in marketable securities.
The securities portfolio has been weighted toward mortgage-backed securities
secured by one-to four-family residential properties. This portfolio also has
included a significant amount of tax exempt municipal securities, primarily
issued by entities located in the State of Washington. In addition to interest
income on loans and investment securities, FSBW receives other income from
deposit service charges, loan servicing fees and from the sale of loans and
investments. FSBW has sought to increase its other income by retaining loan
servicing rights on some of the loans that it has sold. FSBW also has a
wholly-owned subsidiary, Northwest Financial Corporation, which serves as the
trustee under FSBW's mortgage loan documents, is engaged in real estate sales,
and receives commissions from the sale of annuities.
Inland Empire Bank is a community oriented commercial bank which historically
has offered a wide variety of deposits and loan products to its consumer and
commercial customers. Lending activities have included origination of
consumer, commercial, agribusiness and real estate loans. IEB also has engaged
in mortgage banking activity with respect to residential lending within its
local markets, originating loans for sale generally on a servicing released
basis. Additionally, IEB has maintained a significant portion of its assets in
marketable securities, particularly U.S. Treasury and government agency
securities as well as tax exempt municipal securities issued primarily by
entities located in the State of Oregon. IEB operates a division, Inland
Financial Services, which offers insurance and brokerage services to its
customers. IEB has two wholly owned subsidiaries: Pioneer American Property
Company, which owns a building that is leased to IEB, and Inland Securities
Corporation, which previously made a market for IEB's stock but is currently
inactive.
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TB is a community oriented commercial bank chartered in the State of
Washington. TB's lending activities consist of granting commercial loans,
including commercial real estate, land development and construction loans, and
consumer loans to customers throughout King and Snohomish counties in western
Washington. TB is a "Preferred Lender" with the Small Business Administration
(SBA) and the Bank generates a large volume of SBA guaranteed loans for
resale.
The Company and the Banks are subject to regulation by the Federal Reserve
Board (FRB) and the FDIC, the State of Washington Department of Financial
Institutions, Division of Banks (Division), and the State of Oregon Department
of Consumer and Business Services and the State of Idaho, Department of
Finance.
The Board of Directors of the Company passed a resolution on October 22, 1998
changing its fiscal year end from March 31st to December 31st. It will be
effective for the year ending 1999.
ACQUISITIONS AND MERGERS
TOWNE BANK
On April 1, 1998 FWWB completed the acquisition of Towne Bancorp, Inc. FWWB
paid $28.2 million in cash and common stock for all of the outstanding common
shares and stock options of Towne Bancorp, Inc., which was the holding company
for Towne Bank (TB), headquartered in Woodinville, Washington, a Seattle
suburb. As a result of the merger of Towne Bancorp, Inc. into FWWB, TB became
a wholly owned subsidiary of FWWB. The acquisition was accounted for as a
purchase and resulted in the recording of $19.2 million of costs in excess of
the fair value of Towne Bancorp, Inc. net assets acquired (goodwill). Goodwill
assets are being amortized over a 14-year period resulting in a current charge
to earnings of $343,800 per quarter or $1,375,000 per year. Founded in 1991,
TB is a community business bank which had, before recording of goodwill,
approximately $146 million in total assets, $134 million in deposits, $120
million in loans and $9.3 million in shareholders' equity at March 31, 1998.
TB operates six full service branches in the Seattle, Washington, metropolitan
area--in Woodinville, Kirkland, Redmond, Bellevue, Renton and Bothell.
WHATCOM STATE BANCORP, INC.
On January 1, 1999 FWWB completed the acquisition of Whatcom State Bancorp,
Inc. FWWB paid $12.1 million in common stock for all the outstanding common
shares and stock options of Whatcom State Bancorp, Inc., which was the holding
company, for Whatcom State Bank (WSB), headquartered in Bellingham,
Washington. As a result of the merger of Whatcom State Bancorp, Inc. into
FWWB, WSB became a division of FSBW. The acquisition was accounted for as a
purchase and resulted in the recording of approximately $6.3 million of costs
in excess of the fair value of Whatcom State Bancorp, Inc. net assets acquired
(goodwill). Goodwill assets are being amortized over a 14-year period
resulting in a current charge to earnings of approximately $114,300 per
quarter or $457,000 per year. Founded in 1980, WSB is a community commercial
bank which had, before recording of goodwill, approximately $99 million in
total assets, $85 million in deposits, $79 million in loans, and $5.4 million
in shareholders' equity at December 31, 1998. WSB operates five full service
branches in the Bellingham, Washington, area--Bellingham, Ferndale, Lynden,
Blaine and Point Roberts.
SEAPORT CITIZENS BANK
Subsequent to year end, on April 1, 1999 FWWB and FSBW completed the
acquisition of Seaport Citizens Bank (SCB). FSBW paid $10.1 million in cash
for all the outstanding common shares of SCB, which is headquartered in
Lewiston, Idaho. As a result of the merger of SCB into FSBW, SCB became a
division of FSBW. The acquisition will be accounted for as a purchase and
result in the recording of approximately $6.2 million of costs in excess of
the fair value of SCB's net assets acquired (goodwill). Goodwill assets will
be amortized over a 14-year period and will result in a current charge to
earnings of approximately $107,200 per quarter, beginning in the first quarter
of fiscal 2000, or $429,000 per year. Founded in 1979, SCB is a commercial
bank which had, before recording of goodwill, approximately $45 million in
total assets, $41 million in deposits, $27 million in loans, and $4.1 million
in shareholders' equity at March 31, 1999. SCB operates two full service
branches in the Lewiston, Idaho, area.
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ADOPTION OF DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
In October 1997, the Company adopted a dividend reinvestment and stock
purchase plan. Under the terms of the plan all registered stockholders with
100 or more shares of stock may automatically reinvest all or a portion of
their cash dividends in additional shares of the Company's common stock. In
addition, qualifying participants may also make optional monthly cash payments
of $50 to $1,500 to purchase additional shares of Company stock.
LENDING ACTIVITIES
General: Historically, the Banks have offered a wide range of loan products to
meet the demands of their customers. The Banks originate loans for both their
own loan portfolios and for sale in the secondary market. Management's
strategy has been to maintain a significant percentage of assets in these loan
portfolios in loans with more frequent interest rate repricing terms or
shorter maturities than traditional long term fixed-rate mortgage loans. As
part of this effort, the Banks have developed a variety of floating or
adjustable-interest rate products that correlate closer with the Banks cost of
funds. In response to customer demand, however, the Banks continue to
originate fixed-interest rate loans including fixed-rate mortgage loans with
terms up to 30 years. The relative amount of fixed-rate loans and
adjustable-rate loans that can be originated at any time is largely determined
by the demand for each in a competitive environment.
FSBW's primary lending focus is on the origination of loans secured by first
mortgages on owner-occupied, one- to four-family residences and loans for the
construction of one- to four-family residences. FSBW also originates, to a
lesser degree, consumer, commercial real estate, multi-family real estate and
land loans. More recently, FSBW has begun marketing non-mortgage commercial
and agribusiness loans to small businesses and farmers. Management expects
this type of lending to increase at FSBW. At March 31, 1999, FSBW's net loan
portfolio totaled $773.5 million. Over 68% of FSBW's first mortgage loans are
secured by properties located in the State of Washington.
The aggregate amount of loans that FSBW is permitted to make under applicable
federal regulations to any one borrower, including related entities, is the
greater of 20% of unimpaired capital and surplus or $500,000. At March 31,
1999, the maximum amount which FSBW could have lent to any one borrower and
the borrower's related entities was $21.6 million. At March 31, 1999, FSBW had
no loans to one borrower with an aggregate outstanding balance in excess of
this amount. FSBW had 47 borrowers with total loans outstanding in excess of
$2.0 million at March 31, 1999. At that date, the largest amount outstanding
to any one borrower and the borrower's related entities totaled $12.0 million,
which consisted of 39 single family, land development and lot loans in the
Tacoma, Bellevue and Tri-Cities, Washington; and Portland, Oregon areas. At
March 31, 1999, all except $2.8 million of these loans were performing in
accordance with their terms. The $2.8 million is a series of loans on multiple
four-plex developments (and one five-plex) in Hermiston, Oregon. The loans
have been classified as impaired and loan loss reserves of $551,000 have been
allocated to absorb potential losses.
Lending activities at Inland Empire Bank have included origination of
consumer, commercial, agribusiness and commercial real estate loans. In
particular, IEB has developed significant expertise and market share with
respect to small business and agricultural loans within its local markets. In
addition, IEB has originated one-to four-family residential real estate loans
for sale in the secondary market.
At March 31, 1999, IEB's net loan portfolio totaled $142.2 million. The
aggregate amount of loans that IEB is permitted to make under applicable state
and federal regulations to any one borrower, including related entities, is
15% of the aggregate paid-up and unimpaired capital and surplus. At March 31,
1999, the maximum amount IEB could have lent to any one borrower and the
borrower's related entities was $2.9 million ($4.7 million if secured by real
estate). At that date, the largest amount outstanding to any one borrower of
IEB totaled $3.3 million and was made to an alfalfa food processor and
exporter.
Lending activities at Towne Bank have included origination of consumer,
commercial, commercial real estate and construction loans. In particular, TB
has developed significant expertise and growing market share with respect to
small business loans within its local markets.
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At March 31, 1999, TB's net loan portfolio totaled $187.0 million. The
aggregate amount of loans TB is permitted to make under applicable state and
federal regulations to any one borrower, including related entities, is 20% of
the aggregate paid-up and unimpaired capital and surplus. At March 31, 1999,
the maximum amount TB could have lend to any one borrower and the borrower's
related entities was $3.3 million. At that date, the largest amount
outstanding to any one borrower of TB totaled $2.5 million which is a two
motel operation in the Seattle area.
One-to Four-Family Residential Real Estate Lending: The Banks originate loans
secured by first mortgages on owner-occupied, one- to four-family residences
and loans for the construction of one- to four-family residences in the
communities where they have established full service branches. In addition,
the Banks operate loan production offices in Bellevue, Puyallup, Oak Harbor
and Spokane, Washington and LaGrande and Condon, Oregon. FSBW also has a
significant relationship with a mortgage loan broker in the greater Portland,
Oregon market. At March 31, 1999, $407.7 million, or 34.2% of the Company's
loan portfolio, consisted of permanent loans on one-to four-family residences.
Historically, FSBW has originated both fixed-rate loans and adjustable-rate
residential loans for its portfolio. Since the early 1980s, FSBW has
restructured its loan portfolio to reflect a larger percentage of adjustable-
rate loans. Fifteen and 30-year fixed-rate residential loans generally have
been sold into the secondary market; however, a portion of the fixed-rate
loans originated by FSBW have been retained in the loan portfolio to meet
asset/liability management objectives. The number of fixed-rate loans retained
by FSBW increased substantially during 1996 and remained high in fiscal years
1997 and 1998 in response to the capital deployment and growth objectives of
the Company. For the past year FSBW has been selling a larger portion of its
newly originated fixed rate loans as a part of its interest rate risk
management strategy. Both before and after their acquisition by the Company,
WSB and SCB engaged in residential lending, including secondary market
activities, in a fashion very similar to FSBW.
Historically, Inland Empire Bank has sold most of its residential loans into
the secondary market and has continued to so do subsequent to its acquisition
by the Company. Generally IEB has sold loans on a servicing-released basis
such that no revenue is realized by IEB after the sale.
Generally, Towne Bank has not engaged in one-to four-family residential
lending.
In the loan approval process, the Banks assess the borrower's ability to repay
the loan, the adequacy of the proposed security, the employment stability of
the borrower and the creditworthiness of the borrower. As part of the loan
application process, qualified independent appraisers inspect and appraise the
security property. All appraisals are subsequently reviewed by a loan
underwriter and, if necessary, by the Banks' chief appraiser.
The Banks' residential loans are generally underwritten and documented in
accordance with the guidelines established by Freddie Mac and Fannie Mae.
Government insured loans are generally underwritten and documented in
accordance with the guidelines established by the Department of Housing and
Urban Development (HUD) and the Veterans Administration (VA). The Banks' loan
underwriters are approved as underwriters under HUD's delegated underwriter
program.
The Banks sell whole loans on either a servicing-retained or servicing-
released basis. All loans are sold without recourse. Occasionally, the Banks
will sell a participation interest in a loan or pool of loans to an investor.
In these instances, the Banks retain a small percentage of the loan(s) and
pass through a net yield to the investor on the percentage sold. The decision
to hold or sell loans is based on asset/liability management goals and
policies and market conditions. Recently, FSBW has sold a significant portion
of its conventional fixed-rate mortgage originations and all of its government
insured loans into the secondary market. IEB has continued to sell most of its
residential loan originations.
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The Banks offer adjustable-rate mortgages (ARMs) at rates and terms
competitive with market conditions. The Banks offer several ARM products which
adjust annually after an initial period ranging from one to five years subject
to a limitation on the annual increase of 1.0% to 2.0% and an overall
limitation of 5.0% to 6.0%. Certain ARM loans are originated with an option to
convert the loan to a 30-year fixed-rate loan at the then prevailing market
interest rate. Generally these ARM products utilize the weekly average yield
on one-year U.S. Treasury securities adjusted to a constant maturity of one
year plus a margin of 2.75% to 3.25%. ARM loans held in the Banks' portfolios
do not permit negative amortization of principal and carry no prepayment
restrictions. Borrower demand for ARM loans versus fixed-rate mortgage loans
is a function of the level of interest rates, the expectations of changes in
the level of interest rates and the difference between the initial interest
rates and fees charged for each type of loan. In recent years borrower demand
for ARM loans has been limited and the Banks have chosen not to aggressively
pursue ARM loans by offering minimally profitable deeply discounted teaser
rates. As a result ARM loans have represented only a very small portion of
loans originated during this period.
The retention of ARM loans in the Banks' loan portfolios can help reduce the
Company's exposure to changes in interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased interest
to be paid by the customer due to increases in interest rates. It is possible
that, during periods of rising interest rates, the risk of default on ARM
loans may increase as a result of repricing and the increased costs to the
borrower. Furthermore, because the ARM loans originated by the Banks generally
provide, as a marketing incentive, for initial rates of interest below the
rates which would apply were the adjustment index plus the margin used for
pricing initially, these loans are subject to increased risks of default or
delinquency. The Banks attempt to reduce the potential for delinquencies and
defaults on ARM loans by qualifying the borrower based on the borrower's
ability to repay the ARM loan assuming that the maximum interest rate that
could be charged at the first adjustment period remains constant during the
loan term. Another consideration is that although ARM loans allow the Banks to
increase the sensitivity of their asset bases to changes in the interest
rates, the extent of this interest sensitivity is limited by the periodic and
lifetime interest rate adjustment limits (caps). Because of these
considerations, the Company has no assurance that yields on ARM loans will be
sufficient to offset increases in its cost of funds.
It is the Banks' normal policy to lend up to 95% of the lesser of the
appraised value of the property or purchase price of the property on
conventional loans, although ARM loans are normally restricted to not more
than 90%. Higher loan-to-value ratios are available on certain government
insured programs and on a recently introduced limited program strictly
underwritten and insured by United Guaranty Insurance Corporation. The Banks
generally require private mortgage insurance on residential loans with a
loan-to-value ratio at origination exceeding 80%.
Construction and Land Lending: FSBW and TB invest a significant proportion of
their loan portfolio in residential construction loans to professional home
builders. This activity has been prompted by favorable economic conditions in
the Northwest, lower long-term interest rates and an increased demand for
housing units as a result of the migration of people from other parts of the
country to the Northwest. To a lesser extent, FSBW and TB also originates land
loans. IEB also originates construction and land loans although to a much
smaller degree than FSBW and TB. At March 31, 1999, construction and land
loans totaled $217.1 million, or 18.2% of total loans of the Company.
Construction loans made by the Banks include both those with a sale contract
or permanent loan in place for the finished homes and those for which
purchasers for the finished homes may be identified either during or following
the construction period. The Banks monitor the number of unsold homes in their
construction loan portfolios, and generally maintain the portfolios so that no
more than 60-70% of their construction loans are secured by homes for which
there is not a sale contract in place.
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Construction and land lending affords the Banks the opportunity to achieve
higher interest rates and fees with shorter terms to maturity than does
single-family permanent mortgage lending. Construction and land lending,
however, is generally considered to involve a higher degree of risk than
single-family permanent mortgage lending because of the inherent difficulty in
estimating both a property's value at completion of the project and the
estimated cost of the project. The nature of these loans is such that they are
generally more difficult to evaluate and monitor. If the estimate of
construction cost proves to be inaccurate, the Banks may be required to
advance funds beyond the amount originally committed to permit completion of
the project. If the estimate of value upon completion proves to be inaccurate,
the Banks may be confronted at, or prior to, the maturity of the loan with a
project whose value is insufficient to assure full repayment. Projects may
also be jeopardized by disagreements between borrowers and builders and by the
failure of builders to pay subcontractors. Loans to builders to construct
homes for which no purchaser has been identified carry more risk because the
payoff for the loan is dependent on the builder's ability to sell the property
prior to the time that the construction loan is due. The Banks have sought to
address these risks by adhering to strict underwriting policies, disbursement
procedures, and monitoring practices.
The maximum number of speculative loans approved for each builder is based on
a combination of factors, including the financial capacity of the builder, the
market demand for the finished product, and the ratio of sold to unsold
inventory the builder maintains. The Banks have chosen to diversify the risk
associated with speculative construction lending by doing business with a
large number of smaller builders spread over a relatively large geographic
area.
Loans for the construction of one-to four-family residences are generally made
for a term of 12 months. The Banks' loan policies include maximum loan-to-
value ratios of up to 80% for speculative loans. Each individual speculative
loan request is supported by an independent appraisal of the property and the
loan file includes a set of plans, a cost breakdown and a completed
specifications form. All speculative construction loans must be approved by
senior loan officers. At March 31, 1999, the Company's speculative
construction portfolio included loans to 221 individual builders in 90
separate communities. At March 31, 1999, the Company had 29 home builders, who
individually in the aggregate, had construction loans outstanding with
balances exceeding $1.0 million.
The Company regularly monitors the construction loan portfolio and the
economic conditions and housing inventory in each of its markets and will
decrease construction lending if it perceives there are unfavorable market
conditions. The Company believes that the internal monitoring system in place
mitigates many of the risks inherent in its construction lending.
To a much lesser extent, the Banks make land loans to developers, builders and
individuals to finance the acquisition and/or development of improved lots or
unimproved land. In making land loans the Banks follow underwriting policies
and disbursement procedures similar to those for construction loans. The
initial term on land loans is typically one to three years with interest only
payments, payable monthly, and provisions for principal reduction as lots are
sold and released.
Multifamily and Commercial Real Estate Lending: The Banks also originate loans
secured by multifamily and commercial real estate. At March 31, 1999, the
Company's loan portfolio included $57.5 million in multifamily and $267.4
million in commercial real estate loans (including commercial real estate
construction lending). Multifamily and commercial real estate lending affords
the Banks an opportunity to receive interest at rates higher than those
generally available from one- to four-family residential lending. However,
loans secured by such properties are generally greater in amount, more
difficult to evaluate and monitor and, therefore, involve a greater degree of
risk than one-to four-family residential mortgage loans. Because payments on
loans secured by multifamily and commercial properties are often dependent on
the successful operation and management of the properties, repayment of such
loans may be affected by adverse conditions in the real estate market or the
economy.
In all multifamily and commercial real estate lending, the Banks consider the
location, marketability and overall attractiveness of the properties. The
Banks current underwriting guidelines for commercial real estate loans require
an appraisal from a qualified independent appraiser and an economic analysis
of each property with regard to the annual revenue and expenses, debt service
coverage and fair value to determine the maximum loan amount. In the approval
process the Banks assess the borrowers willingness and ability to repay and
the adequacy of the collateral.
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Multifamily and commercial real estate loans originated by the Banks are
predominately fixed rate loans with intermediate terms of 10 years. More
recently originated multifamily and commercial loans are linked to various
constant maturity U.S. Treasury indices or certain prime rates. Rates on these
ARM loans generally adjust annually after an initial period ranging from one
to ten years. Rate adjustments for the more seasoned ARM loans in the
portfolio predominantly reflect changes in the Federal Home Loan Bank (FHLB)
National Monthly Median Cost of Funds index. The Banks' commercial real estate
portfolios consist of loans on a variety of property types including motels,
nursing homes, office buildings, and mini-warehouses. Multifamily loans
generally are secured by small to medium sized projects.
At March 31, 1999, the Banks' loan portfolio included 136 multifamily loans,
the average loan balance of which was $407,000. At March 31, 1999, the Banks
had 59 multifamily or commercial real estate loans with balances over $3.3
million, the largest of which was $5.3 million. Most of the properties
securing these multifamily and commercial real estate loans are located in the
Northwest however the Company has acquired some participation loans on
properties located in California.
Agriculture/commercial Lending. Inland Empire Bank has been very active in
small business and agricultural lending, Towne Bank has also been very active
in commercial lending, however TB generally has not engaged in agricultural
lending. IEB and TB's management have devoted a great deal of effort to
developing customer relationships and the ability to serve this type of
borrower. It is management's belief that many very large banks have in the
past neglected small business lending, thus contributing to IEB's and TB's
success. IEB and TB will continue to emphasize this segment of lending in
their market areas. Management intends to leverage their past success and
local decision making ability to continue to expand this market niche.
Historically, Towne Bank has sold most of its small business administration
loans into the secondary market, servicing retained, and has continued to so
do subsequent to its acquisition by the Company.
First Savings Bank has recently begun making non-mortgage agricultural and
commercial loans. FSBW has staffed its Walla Walla, Tri-Cities, Clarkston,
Yakima and Wenatchee offices with experienced commercial bankers and
anticipates a steady growth in the origination of small business and
agricultural loans. It is expected the growth will come primarily from FSBW's
existing customer base and referrals from officers and Directors. In addition
to providing higher yielding assets, it is anticipated that this type of
lending will increase the deposit base of these branches. Expanding
non--mortgage agricultural/commercial lending is currently an area of
significant effort at FSBW. Similar to IEB and TB, WSB and SCB have been
active in commercial lending.
Similar to consumer loans, agricultural and commercial loans may entail
greater risk than do residential mortgage loans. Agricultural and commercial
loans may be unsecured or secured by special purpose or rapidly depreciating
assets, such as equipment, crops, live stock, inventory and receivables which
may not provide an adequate source of repayment on defaulted loans. In
addition, agricultural and commercial loans are dependent on the borrower's
continuing financial stability and management ability as well as market
conditions for various products, services and commodities. For these reasons,
agricultural and commercial loans generally provide higher yields than
residential loans but also require more administrative and management
attention. Interest rates on agricultural and commercial loans may be either
fixed or adjustable. Loan terms including the fixed or adjustable interest
rate, the loan maturity and the collateral considerations vary significantly
and are negotiated on an individual loan basis. At March 31, 1999,
agribusiness/commercial loans totaled $196.7 million, or 16.5% of total loans
of the Company.
In all agricultural and commercial lending, the Banks consider the borrowers
credit worthiness and ability to repay and the adequacy of the offered
collateral. Current underwriting guidelines for agricultural/commercial loans
require an economic analysis with regard to annual revenue and expenses, debt
service coverage, collateral and fair value to determine the maximum loan
amount. Before the Banks make a commercial loan, the borrower must obtain the
approval of various levels of Bank personnel, depending on the size and
characteristics of the loan.
Consumer and Other Lending: The Banks originate a variety of consumer loans,
including secured second mortgage loans, automobile loans, credit card loans
and loans secured by deposit accounts. Consumer and other lending has
traditionally been a small part of FSBW's and TB's business. However, recent
efforts at FSBW have led to a substantial increase in credit card loans to its
existing customer base. Inland Empire Bank, on the other hand, has been an
active originator of consumer loans. At March 31, 1999, the Company had $44.4
million, or 3.7% of its loans receivable, in outstanding consumer and other
loans.
9
<PAGE>
Consumer loans often entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciating assets such as automobiles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. The remaining
deficiency often does not warrant further substantial collection efforts
against the borrower beyond obtaining a deficiency judgment. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
Such loans may also give rise to claims and defenses by a consumer loan
borrower against an assignee of such loans such as the Banks, and a borrower
may be able to assert against such assignee claims and defenses that it has
against the seller of the underlying collateral.
Loan Solicitation and Processing: The Banks originate real estate loans by
direct solicitation of real estate brokers, builders, depositors, and walk-in
customers. Loan applications are taken by the Banks' loan officers and are
processed in each branch location. Most underwriting and all audit functions
are performed by loan administration personnel at each Bank's main office.
Applications for fixed-rate and adjustable-rate mortgages on one-to
four-family properties are generally underwritten and closed based on Freddie
Mac/Fannie Mae standards, and other loan applications are underwritten and
closed based on the Banks' own written guidelines.
Consumer loans are originated through various marketing efforts directed
primarily toward existing deposit and loan customers of the Banks. Consumer
loan applications may be processed at branch locations or by administrative
personnel at the Banks' main offices.
Commercial and agricultural loans are solicited by loan officers of each Bank
by means of call programs focused on local businesses and farmers. Credit
decisions on significant commercial and agricultural loans are made by senior
loan officers or in certain instances by the Board of Directors of each Bank
or the Company.
LOAN ORIGINATIONS, SALES AND PURCHASES
While the Banks originate a variety of loans, their ability to originate loans
and their ability to originate each type of loan is dependent upon the
relative customer demand and competition for loans in each market. For the
years ended March 31, 1999, 1998 and 1997, the Banks originated $734.1
million, $513.5 million and $330.3 million of loans, respectively. The
Company's net loan portfolio grew $345.8 million or 45.7% in fiscal 1999
($146.4 million excluding acquisitions) compared to $111.0 million of growth
in fiscal 1998 and $230.6 million of growth in fiscal 1997 ($90.5 million
excluding acquisitions).
In recent years prior to 1996 the Company generally sold most of its 30-year
fixed-rate one- to four-family residential mortgage loans to secondary market
purchasers. For the years ended March 31, 1996 and 1997 the Company sold a
smaller portion of its fixed-rate loan originations choosing to retain loans
in response to its capital deployment and growth objectives. In the second
half of fiscal year 1999 the Company increased the amount of new fixed-rate
residential loan sold as part of its interest rate risk management strategy.
Sales of loans by the Company for the years ended March 31, 1999, 1998 and
1997 totaled $125.7 million, $80.6 million and $36.6 million, respectively.
Sales of whole loans generally are beneficial to the Company since these sales
may generate income at the time of sale, provide funds for additional lending
and other investments and increase liquidity. The Company sells loans on both
a servicing-retained and a servicing-released basis. See "Loan Servicing-Loan
Servicing Portfolio." At March 31, 1999, the Company had $12.4 million in
loans held for sale.
The Banks, especially FSBW, purchase whole loans and loan participation
interests primarily during periods of reduced loan demand in their primary
market. Any such purchases are made consistent with the Banks' underwriting
standards; however, the loans may be located outside of the Banks' normal
lending area. During the years ended March 31, 1999, 1998 and 1997, the
Company purchased $86.2 million, $51.1 million and $74.1 million,
respectively, of loans and loan participation interests.
10
<PAGE>
<TABLE>
LOAN PORTFOLIO ANALYSIS.. The following table sets forth the composition of the Company's loan portfolio
(including loans held for sale) by type of loan as of the dates indicated.
MARCH 31
--------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ---------------- --------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN:
-------------
One-to four-family
real estate $ 407,673 34.24% $423,850 51.53% $395,418 55.86% $311,472 68.24% $199,585 59.81%
Commercial and
multifamily
properties 324,858 27.28 167,859 20.41 129,198 18.25 77,613 16.99 73,443 22.01
Construction and
land 217,094 18.23 132,409 16.10 110,262 15.58 62,177 13.62 57,913 17.36
Agriculture/
commercial 196,743 16.52 67,611 8.22 47,846 6.76 871 .19 902 .27
Consumer and other 44,346 3.73 30,842 3.74 25,092 3.55 4,333 .96 1,842 .55
--------- ------ ------- ------ -------- ------ ------- ------ -------- ------
Total loans 1,190,714 100.00% 822,571 100.00% 707,816 100.00% 456,466 100.00% 333,685 100.00%
--------- ====== ------- ====== -------- ====== ------- ====== ------- ======
Undisbursed
funds for loans
in progress 71,638 54,500 52,412 35,244 28,507
Deferred loan
fees and discounts 4,146 3,297 2,775 1,876 2,226
Allowance for loan
losses 12,261 7,857 6,748 4,051 3,549
---------- -------- -------- -------- --------
Total loans
receivable, net $1,102,669 $756,917 $645,881 $415,295 $299,403
========== ======== ======== ======== ========
11
</TABLE>
<PAGE>
LOAN MATURITY AND REPRICING
The following table sets forth certain information at March 31, 1999 regarding
the dollar amount of loans maturing in the Company's portfolio based on their
contractual terms to maturity, but does not include scheduled payments or
potential prepayments. Demand loans, loans having no stated schedule of
repayments and no stated maturity, and overdrafts are reported as due in one
year or less. Loan balances are net of undisbursed loan proceeds, unamortized
premiums and discounts, and exclude the allowance for loan losses (in
thousands):
Maturing Maturing Maturing
Maturing within within within Maturing
Within 1 to 3 to 5 to Beyond
One Year 3 Years 5 Years 10 Years 10 Years Total
-------- -------- --------- --------- -------- ----------
One-to four-
family real
estate $ 3,549 $ 3,645 $ 6,098 $ 15,774 $360,418 $ 389,484
Commercial and
multifamily
properties 24,235 50,053 60,833 116,501 67,823 319,445
Construction
and land 141,881 13,313 1,955 3,968 4,138 165,255
Agriculture/
commercial 96,955 20,000 36,009 35,213 8,189 196,366
Consumer and
other 16,555 9,239 11,421 2,549 4,616 44,380
-------- -------- --------- --------- -------- ----------
Total loans $283,175 $ 96,250 $ 116,316 $ 174,005 $445,184 $1,114,930
======== ======== ========= ========= ======== ==========
Scheduled contractual principal repayments of loans do not reflect the actual
life of such assets. The average life of loans is substantially less than
their contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Company the right to declare loans
immediately due and payable in the event that the borrower sells the real
property subject to the mortgage and the loan is not repaid. The average life
of mortgage loans tends to increase, however, when current mortgage loan
market rates are substantially higher than rates on existing mortgage loans
and, conversely, decreases when rates on existing mortgage loans are
substantially higher than current mortgage loan market rates.
The following table sets forth the dollar amount of all loans due after March
31, 2000, which have fixed interest rates and floating or adjustable interest
rates (in thousands).
Fixed Floating or
Rates Adjustable Rates Total
----- ---------------- -----
One-to four-family real estate $315,081 $ 70,854 $385,935
Commercial and
multifamily properties 190,606 104,604 295,210
Construction and land 7,965 15,409 23,374
Agriculture/commercial 42,759 56,652 99,411
Consumer and other 21,238 6,587 27,825
-------- -------- --------
Total $577,649 $254,106 $831,755
======== ======== ========
12
<PAGE>
LOAN SERVICING
General: The Banks receive fees from a variety of institutional owners in
return for performing the traditional services of collecting individual
payments and managing portfolios of sold loans. At March 31, 1999, the Banks
were servicing $268.8 million of loans for others. Loan servicing includes
processing payments, accounting for loan funds and collecting and paying real
estate taxes, hazard insurance and other loan-related items such as private
mortgage insurance. When the Banks receive the gross loan payment from
individual borrowers, they remit to the investor a predetermined net amount
based on the yield on that loan. The difference between the coupon on the
underlying loan and the predetermined net amount paid to the investor is the
gross loan servicing fee. In addition, the Banks retain certain amounts in
escrow for the benefit of the lender for which the Banks incur no interest
expense but are able to invest the funds into earning assets. At March 31,
1999, the Banks held $4.1 million in escrow for their portfolios of loans
serviced for others.
Loan Servicing Portfolio: The loan servicing portfolio at March 31, 1999 was
composed primarily of $32.8 million of Fannie Mae mortgage loans and $198.0
million of Freddie Mac mortgage loans. The balance of the loan servicing
portfolio at March 31, 1999, consisted of loans serviced for a variety of
private investors. At March 31, 1999, the portfolio included loans secured by
property located primarily in the states of Washington or Oregon. For the year
ended March 31, 1999, $798,000 of loan servicing fees, net of $278,000 of
servicing rights amortization, were recognized in operations.
Mortgage Servicing Rights: In addition to the origination of mortgage
servicing rights (MSRs) on the loans that FSBW originates and sells in the
secondary market on a servicing retained basis, FSBW has also purchased
mortgage servicing rights. The cost of MSRs is capitalized and amortized in
proportion to, and over the period of, the estimated future net servicing
income. For the years ending March 31, 1999 and 1998 FSBW capitalized $981,000
and $442,000, respectively, of mortgage servicing rights relating to loans
sold with servicing retained, in addition, $270,000 of MSR's were obtained in
the acquisition of WSB. No MSRs were purchased in fiscal years 1999, 1998 and
1997. Amortization of MSR's for the year ended March 31, 1999 was $278,000
compared to $100,000 for the year ended March 31, 1998. Management
periodically evaluates the estimates and assumptions used to determine the
carrying values of MSRs and the amortization of MSRs. These carrying values
are adjusted when the valuation indicates the carrying value is impaired. At
March 31, 1999, MSRs were carried by FSBW at a value, net of amortization, of
$1,671,000, and no valuation allowance for impairment was considered
necessary. MSRs generally are adversely affected by current and anticipated
prepayments resulting from decreasing interest rates.
ASSET QUALITY
Each Bank's asset classification committee meets at least monthly to review
all classified assets, to approve action plans developed to resolve the
problems associated with the assets and to review recommendations for
new classifications, any changes in classifications and recommendations for
reserves. The committee reports to the Board of Directors quarterly as to the
current status of classified assets and action taken in the preceding quarter.
State and federal regulations require that the Banks review and classify their
problem assets on a regular basis. In addition, in connection with
examinations of insured institutions, state and federal examiners have
authority to identify problem assets and, if appropriate, require them to be
classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets must have one or more defined weaknesses
and are characterized by the distinct possibility that the insured institution
will sustain some loss if the deficiencies are not corrected. Doubtful assets
have the weaknesses of substandard assets with the additional characteristic
that the weaknesses make collection or liquidation in full on the basis of
currently existing facts, conditions and values questionable, and there is a
significant possibility of loss. An asset classified loss is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted. The regulations have also created a special
mention category, described as assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification but do
possess credit deficiencies or potential weaknesses deserving management's
close attention. If an asset or portion thereof is classified loss, the
insured institution establishes specific allowances for loan losses for the
full amount of the portion of the asset classified loss. A portion of general
loan loss allowances established to cover possible losses related to assets
classified substandard or doubtful may be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses generally do not qualify as regulatory capital.
13
<PAGE>
At March 31, 1999, 1998 and 1997, the aggregate amounts of the Banks'
classified assets (as determined by the Banks) were as follows (in thousands):
At March 31
---------------------------------------
1999 1998 1997
---- ---- ----
Loss $ 60 $ - - $ - -
Doubtful 58 - - - -
Substandard assets 8,302 2,776 4,175
Special mention 3,008 - - - -
NON-PERFORMING ASSETS AND DELINQUENCIES.
Real Estate Loans: When a borrower fails to make a required payment when due,
the Banks follow established collection procedures. The first notice is mailed
to the borrower within 10 to 17 days after the payment due date and attempts
to contact the borrower by telephone begin within five to ten days after the
late notice is mailed to the borrower. If the loan is not brought current by
30 days after the payment due date, the Banks will mail a second written
notice to the borrower. If a satisfactory response is not obtained, continuous
follow-up contacts are attempted until the loan has been brought current.
Generally, for residential loans within 30 to 45 days into the delinquency
procedure, the Banks notify the borrower that home ownership counseling is
available. In most cases, delinquencies are cured promptly; however, if after
90 days of delinquency no response has been received nor an approved
reinstatement plan established, foreclosure according to the terms of the
security instrument and applicable law is initiated. Interest income on loans
after 90 days of delinquency is no longer accrued and the full amount of
accrued and uncollected interest is reversed.
Agriculture/commercial and Consumer Loans: When a borrower fails to make
payments as required, a late notice is sent to the borrower. If payment is
still not made the responsible loan officer is advised and contact is made my
telephone or letter. Continuous follow-up contacts are attempted until the
loan has been brought current. Generally, if the loan is not current within 45
to 60 days, action is taken to take possession of the security. A small claims
or lawsuit is normally filed on unsecured loans or deficiency balances at 90
to 120 days. Loans over 90 days delinquent, repossessions, loans in
foreclosure and bankruptcy no longer accrue interest unless a satisfactory
repayment plan has been agreed upon, the loan is a full recourse contract or
fully secured by a deposit account.
14
<PAGE>
The following table sets forth information with respect to the Banks'
non-performing assets and restructured loans within the meaning of SFAS No.
15, Accounting by Debtors and Creditors for Troubled Debt Restructuring, at
the dates indicated (dollars in thousands).
At March 31
---------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Loans accounted for on a nonaccrual basis:
Real estate
One- to four-family $3,564 $ 448 $1,644 $ 526 $336
Commercial and multifamily 351 -- 187 -- --
Construction and land 767 367 -- -- --
Agriculture/commercial 1,439 414 206 -- --
Consumer and other 17 41 45 -- 5
------ ------ ------ ------ ----
Total 6,138 1,270 2,082 526 341
------ ------ ------ ------ ----
Accruing loans which are contractually
past due 90 days or more:
Real estate
One-to four family 20 52 -- -- --
Commercial and multifamily 384 33 -- --
Construction and land -- 32 -- -- --
Agriculture/commercial 1,052 -- -- -- --
Consumer and other 82 33 30 12 --
------ ------ ------ ------ ----
Total 1,538 150 30 12 --
------ ------ ------ ------ ----
Total non-performing loans 7,676 1,420 2,112 538 341
Real estate/repossessed assets held
for sale 1,644 882 1,057 712 588
------ ------ ------ ------ ----
Total non-performing assets $9,320 $2,302 $3,169 $1,250 $929
====== ====== ====== ====== ====
Restructured loans (1) $ 380 $ 305 $ 238 $ 156 $ 165
Total non-performing loans to net loans 0.69% 0.19% 0.33% 0.13% 0.11%
Total non-performing loans to total assets 0.47% 0.20% 0.21% 0.07% 0.07%
Total non-performing assets to total assets 0.57% 0.20% 0.31% 0.17% 0.19%
(1) These loans are performing under their restructured terms but are
classified substandard.
For the year ended March 31, 1999, $269,000 in interest income would have been
recorded had nonaccrual loans been current, and no interest income on such
loans was included in net income for such period.
15
<PAGE>
ALLOWANCE FOR LOAN LOSSES
General: In originating loans, the Banks recognize that losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. As a result, the Banks maintain an
allowance for loan losses consistent with the generally acceptable accounting
principles (GAAP) guidelines outlined in SFAS No. 5, Accounting for
Contingencies. The Banks have established systematic methodologies for the
determination of the adequacy of their allowance for loan losses. The
methodologies are set forth in a formal policy and take into consideration the
need for an overall general valuation allowance as well as specific allowances
that are tied to individual problem loans. The Banks increase their allowance
for loan losses by charging provisions for possible loan losses against the
Bank's income.
On April 1, 1995, the Company and its subsidiary Banks adopted SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosures, an
amendment of SFAS No. 114. These statements require that impaired loans that
are within their scope be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair value
of collateral if the loan is collateral dependent. Subsequent changes in the
measurement of impaired loans shall be included within the provision for loan
losses in the same manner in which impairment initially was recognized or as a
reduction in the provision that would otherwise be reported. The adoption of
these statements had no material impact on the Company's or Banks' financial
condition or results of operations. Prior to the adoption of these statements
a reserve for specific losses was provided for loans when any significant,
permanent decline in value was deemed to have occurred. As of March 31, 1999,
the Company and its subsidiary Banks had identified $3.7 million of impaired
loans as defined by the statement and had established $739,000 of allocated
reserves for these loans. The statements also apply to all loans that are
restructured in a troubled debt restructuring, subsequent to the adoption of
SFAS No. 114, as defined by SFAS No. 15. A troubled debt restructuring is a
restructuring in which the creditor grants a concession to the borrower that
it would not otherwise consider. At March 31, 1999, the Company had $380,000
of restructured loans that, though performing, were classified substandard.
The allowance for losses on loans is maintained at a level sufficient to
provide for estimated losses based on evaluating known and inherent risks in
the loan portfolio and upon management's continuing analysis of the factors
underlying the quality of the loan portfolio. These factors include changes in
the size and composition of the loan portfolio, delinquency rates, actual loan
loss experience, current economic conditions, detailed analysis of individual
loans for which full collectibility may not be assured, and determination of
the existence and realizable value of the collateral and guarantees securing
the loans. Additions to these allowances are charged to earnings. Realized
losses and charge-offs that are related to specific loans are applied as a
reduction of the carrying value of the assets and charged immediately against
the allowance for losses. Recoveries on previously charged off loans are
credited to the allowance. The reserve is based upon factors and trends
identified by management at the time financial statements are prepared. The
Company's methodology for assessing the appropriateness of the allowance
consists of several key elements, which include specific allowances, an
allocated formula allowance, and an unallocated allowance. Losses on specific
loans are provided for when the losses are probable and estimable. The formula
allowance is calculated by applying loss factors to outstanding loans,
excluding loans with specific allowances. Loss factors are based on the
Company's historical loss experience adjusted for significant factors
including the experience of other banking organizations that, in management's
judgment, affect the collectibility of the portfolio as of the evaluation
date. The unallocated allowance is based upon management's evaluation of
various factors that are not directly measured in the determination of the
formula and specific allowances. Although management uses the best information
available, future adjustments to the allowance may be necessary due to
economic, operating, regulatory and other conditions beyond the Bank's
control.
16
<PAGE>
At March 31, 1999, the Company had an allowance for loan losses of $12.3
million which represented 1.10% of net loans and 160% of non-performing loans
compared to 1.03% and 533%, respectively, at March 31, 1998. The provision for
loan losses for the year ended March 31, 1999, increased by $1.2 million to
$2.8 million compared to $1.6 million for fiscal 1998. This increase is
reflective of the growth in loans receivable which, excluding loans acquired
through business combination, increased by $165.7 million for the 1999 fiscal
year compared to an increase of $111.0 million in the 1998 period. The
increase also is reflective of changes in the portfolio mix which resulted in
the need for a higher level of loss allowance as well as the impact of a
greater amount of non-performing loans and net charge-offs for the year.
Specifically, excluding loans acquired through acquisitions, changes in the
loan mix included increases of $119.8 million in commercial and multifamily
real estate loans, $59.3 million in construction and land loans, and $27.9
million in commercial and agricultural loans, while one- to four-family loans
declined by $40.3 million and consumer loans declined by $1 million. Income
producing real estate loans, construction and land loans, commercial and
agricultural loans are generally riskier than one- to four-family residential
loans resulting in a higher provision for losses. Adding to the need for the
increased provision for loan losses for the year ended March 31, 1999 was an
increase in the amount of non-performing loans which grew to $7.7 million
compared to $1.4 million a year earlier. Further adding to the increase in the
provision for loan losses was an increase in the level of net charge-offs
which increased from $519,000 for the year ended March 31, 1998, to $1.1
million for the year ended March 31, 1999 (see Notes 7 and 8 to the
Consolidated Financial Statements for further analysis of the loan portfolio
mix and allowance for loan losses).
While the Company believes that the Banks have established their existing
allowance for loan losses in accordance with Generally Accepted Accounting
Principles (GAAP), there can be no assurance that regulators, in reviewing the
Banks' loan portfolio, will not request the Banks to increase significantly
their allowance for loan losses. In addition, because future events affecting
borrowers and collateral cannot be predicted with certainty, there can be no
assurance that the existing allowance for loan losses is adequate or that
substantial increases will not be necessary should the quality of any loans
deteriorate as a result of the factors discussed above. Any material increase
in the allowance for loan losses may adversely affect the Company's financial
condition and results of operations.
Real Estate Held for Sale, Repossessed Assets: Real estate acquired by the
Company as a result of foreclosure or by deed-in-lieu of foreclosure is
classified as real estate held for sale until it is sold. When property is
acquired it is recorded at the lower of its cost (the unpaid principal balance
of the related loan plus foreclosure costs), or net realizable value.
Subsequent to foreclosure, the property is carried at the lower of the
foreclosed amount or net realizable value. Upon receipt of a new appraisal and
market analysis, the carrying value is written down through the establishment
of a specific reserve to the anticipated sales price less selling and holding
costs. At March 31, 1999, the Company had $1.4 million of real estate owned
and $205,000 of other repossessed assets.
17
<PAGE>
<PAGE>
The following table sets forth an analysis of the Company's gross allowance
for possible loan losses for the periods indicated.
Years Ended March 31
-------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
Allowance at beginning of period $ 7,857 $6,748 $4,051 $3,549 $3,429
------- ------ ------ ------ ------
Acquisitions 2,693 -- 1,416 -- --
------- ------ ------ ------ ------
Provision for loan losses 2,841 1,628 1,423 524 391
------- ------ ------ ------ ------
Recoveries:
Secured by real estate
One - to four-family -- 6 38 -- --
Commercial and multifamily 60 -- -- -- --
Construction and land -- -- -- -- --
Agriculture/commercial 144 29 -- -- --
Consumer and other 21 16 16 -- --
------- ------ ------ ------ ------
Total recoveries 225 51 54 -- --
------- ------ ------ ------ ------
Charge-offs:
Secured by real estate
One - to four-family 25 359 127 -- --
Commercial and multifamily 35 -- -- -- 271
Construction and land 69 11 -- -- --
Agriculture/commercial 916 19 3 -- --
Consumer and other 310 181 66 22 --
------- ------ ------ ------ ------
Total charge-offs 1,355 570 196 22 271
------- ------ ------ ------ ------
Net charge-offs 1,130 519 142 22 271
------- ------ ------ ------ ------
Balance at end of period $12,261 $7,857 $6,748 $4,051 $3,549
======= ====== ====== ====== ======
Ratio of allowance to net loans
outstanding at the end of the
period 1.10% 1.03% 0.94% 0.97% 1.17%
Ratio of net loan charge-offs to
the average net book value of loans
outstanding during the period 0.14% 0.08% 0.04% 0.01% 0.10%
18
<PAGE>
<TABLE>
The following table sets forth the breakdown of the allowance for loan losses by loan category for the
periods indicated.
At March 31
---------------------------------------------------------------------------------------
1999 1998 (2) 1997 1996 1995
--------------- ----------------- --------------- -------------- -----------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to to to to to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Specific or allocated
loss allowances:
Secured by real
estate
One-to four-
family $ 2,757 34.24% $ 1,059 51.53% $ 1,098 55.86% $ -- 68.24%$ 11 59.81%
Commercial and
multifamily 3,567 27.28 849 20.41 547 18.25 -- 16.99 46 22.01
Construction and
land 1,597 18.23 856 16.10 844 15.58 -- 13.62 -- 17.36
Agriculture/
commercial 2,522 16.52 835 8.22 422 6.76 -- .19 -- .27
Consumer and other 841 3.73 307 3.74 237 3.55 -- .96 -- .55
Unallocated general
loss allowance
(1) (2) 977 N/A 3,951 N/A 3,600 N/A 4,051 N/A 3,492 N/A
Total allowance -------- ------ ------- ------ ------- ------ ------- ------ ------- ------
for loan losses $ 12,261 100.00% $ 7,857 100.00% $ 6,748 100.00% $ 4,051 100.00% $ 3,549 100.00%
======== ====== ======= ====== ======= ====== ======= ====== ======= ======
- -------------------
(1) The Company establishes specific loss allowances when individual loans are identified that present a
possibility of loss (i.e., that full collectibility is not reasonably assured). The remainder of the
allowance for loan losses is established for the purpose of providing for estimated losses which are
inherent in the loan portfolio.
(2) For 1997 the Company has not changed how it determines the adequacy of its allowance for loan losses
other than to allocate the non-specific loan loss reserves to loan categories that were the basis for
its accrual. In the periods prior to 1997, it was not the Company's practice to allocate general loan
loss allowances to specific loan categories.
19
</TABLE>
<PAGE>
INVESTMENT ACTIVITIES
Under Washington and Oregon state law, banks are permitted to invest in
various types of marketable securities. Authorized securities include but are
not limited to U.S. Treasury obligations, securities of various federal
agencies, mortgage-backed securities, certain certificates of deposit of
insured banks and savings institutions, banker's acceptances, repurchase
agreements, federal funds, commercial paper, corporate debt and equity
securities and obligations of states and their political sub-divisions. The
investment policies of the Banks are designed to provide and maintain adequate
liquidity and to generate favorable rates of return without incurring undue
interest rate or credit risk. The Banks' policies generally limit investments
to U.S. Government and agency securities, municipal bonds, certificates of
deposit, marketable corporate debt obligations and mortgage-backed securities.
Investment in mortgage-backed securities includes those issued or guaranteed
by Freddie Mac (FHLMC), Fannie Mae (FNMA), Government National Mortgage
Association (GNMA) and privately-issued collateralized mortgage-backed
securities that have an AA credit rating or higher. A high credit rating
indicates only that the rating agency believes there is a low risk of loss or
default. However, all of the Banks' investment securities, including those
that have high credit ratings, are subject to market risk in so far as a
change in market rates of interest or other conditions may cause a change in
an investment's market value.
At March 31, 1999, the Company's consolidated investment portfolio totaled
$364.2 million and consisted principally of U.S. Government and agency
obligations, mortgage-backed securities, municipal bonds, corporate debt
obligations, and stock of FNMA and FHLMC. From time to time, investment levels
may be increased or decreased depending upon yields available on investment
alternatives, and management's projections as to the demand for funds to be
used in the Banks' loan originations, deposits and other activities. During
fiscal 1999 investments and securities increased by $61.6 million (including
$45.7 million obtained in the acquisitions of TB and WSB). Holdings of
mortgage-backed securities increased $45.7 million and U.S. Treasury and
agency obligations decreased $9.1 million. Ownership of corporate and other
securities increased $20.0 million. Municipal bonds increased $5.0 million
primarily from acquisitions.
Mortgage-Backed and Mortgage-Related Securities: The Company purchases
mortgage-backed securities in order to: (i) generate positive interest rate
spreads on large principal balances with minimal administrative expense; (ii)
lower the credit risk of the Company as a result of the guarantees provided by
FHLMC, FMNA, and GNMA; (iii) enable the Company to use mortgage-backed
securities as collateral for financing; and (iv) increase liquidity. The
Company invests primarily in federal agency mortgage-backed securities,
principally FNMA, FHLMC and GNMA. The Company also invests in agency sponsored
and corporate collateralized mortgage obligations (CMOs) and real estate
mortgage investment conduits (REMICs). At March 31, 1999, net mortgage-backed
securities totaled $242.8 million, or 14.9% of total assets. At March 31,
1999, 47.6% of the mortgage-backed securities were adjustable-rate and 52.5%
were fixed-rate. The estimated fair value of the Company's mortgage-backed
securities at March 31, 1999, was $242.8 million, which is $607,000 less than
the amortized cost of $243.4 million. At March 31, 1999, the Company's
portfolio of mortgage-backed securities had a weighted average coupon rate of
6.53%. The estimated weighted average remaining life of the portfolio was 3.2
years based on the last 3 months"constant prepayment rate" (CPR) or the most
recent CPR if less than 3 months history is available.
Mortgage-backed securities known as PC's or mortgage pass-through certificates
generally represent a participation interest in a pool of single-family
mortgages. The principal and interest payments on these mortgages are passed
from the mortgage originators, through intermediaries (generally U.S.
Government agencies and government sponsored enterprises) that pool and resell
the participation interests in the form of securities, to investors such as
the Company. Mortgage participation certificates generally yield less than the
loans that underlie such securities because of the cost of payment guarantees
and credit enhancements. In addition, PC's are usually more liquid than
individual mortgage loans and may be used to collateralized certain
liabilities and obligations of the Company. These types of securities also
permit the Company to optimize its regulatory capital because of their low
risk weighting.
20
<PAGE>
CMOs and REMICs are mortgage-related obligations and may be considered as
derivative financial instruments because they are created by redirecting the
cash flows from the pool of mortgages or mortgage-backed securities underlying
these securities into two or more classes (or tranches) with different
maturity or risk characteristics. Management believes these securities may
represent attractive alternatives relative to other investments due to the
wide variety of maturity, repayment and interest rate options available. At
March 31, 1999 the Company held CMOs and REMICs with a net carrying value of
$209.9 million.
Of the Company's $242.8 million mortgage-backed securities portfolio at March
31, 1999, $120.0 million with a weighted average yield of 5.52% had
contractual maturities or period to repricing within ten years and $122.8
million with a weighted average yield of 6.85% had contractual maturities or
period to repricing over ten years. However, the actual maturity of a
mortgage-backed security is usually less than its stated maturity due to
prepayments of the underlying mortgages. Prepayments that are faster than
anticipated may shorten the life of the security and may result in rapid
amortization of premiums or discounts and thereby affect the net yield on such
securities. Although prepayments of underlying mortgages depend on many
factors, including the type of mortgages, the coupon rate, the age of
mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates, the
difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates generally is the most significant
determinant of the rate of prepayments. During periods of declining mortgage
interest rates, if the coupon rate of the underlying mortgages exceeds the
prevailing market interest rates offered for mortgage loans, refinancing
generally increases and accelerates the prepayment of the underlying mortgages
and the related security. Under such circumstances, the Company may be subject
to reinvestment risk because, to the extent that the Company's mortgage-backed
securities amortize or prepay faster than anticipated, the Company may not be
able to reinvest the proceeds of such repayments and prepayments at a
comparable rate. In contrast to mortgage-backed securities in which cash flow
is received (and hence, prepayment risk is shared) pro rata by all securities
holders, the cash flow from the mortgages or mortgage-backed securities
underlying REMICs or CMOs is segmented and paid in accordance with a
predetermined priority to investors holding various tranches of such
securities or obligations. A particular tranche of REMICs and CMOs may
therefore carry prepayment risk that differs from that of both the underlying
collateral and other tranches.
Municipal Bonds: The Company's tax exempt municipal bond portfolio, which at
March 31, 1999, totaled $32.3 million at estimated fair value ($33.0 million
at amortized cost), was comprised of general obligation bonds (i.e., backed by
the general credit of the issuer) and revenue bonds (i.e., backed by revenues
from the specific project being financed) issued by various authorities,
hospitals, water and sanitation districts located in the states of Washington,
Oregon and Idaho. At March 31, 1999, general obligation bonds and revenue
bonds had total estimated fair values of $19.9 million and $14.4 million,
respectively. The company also acquired taxable revenue bonds in fiscal year
1999 totaling $2.8 million at estimated fair value ($2.7 million at amortized
cost). Many bank qualifying municipal bonds are not rated by a nationally
recognized credit rating agency (e.g., Moody's or Standard and Poor's) due to
their smaller size. At March 31, 1999, the Company's municipal bond portfolio
had a weighted average maturity of approximately 10.2 years and an average
coupon rate of 6.38%. The largest security in the portfolio was an industrial
revenue bond issued by the City of Kent, Washington, with an amortized cost of
$3.6 million and a fair value of $3.6 million.
Corporate Bonds: The Company's corporate bond portfolio, which totaled $24.3
million at fair value ($24.7 million at amortized cost) at March 31, 1999, was
composed of short and long-term fixed-rate and adjustable-rate securities. At
March 31, 1999, the portfolio had a weighted average maturity of 18.8 years
and a weighted average coupon rate of 6.58%. The longest term security, has an
amortized cost of $3.2 million and a term to maturity of 28.0 years.
U.S. Government and Agency Obligations: The Company's portfolio of U.S.
Government and agency obligations had a fair value of $56.5 million ($56.5
million at amortized cost) at March 31, 1999. The Company's subsidiary, FSBW,
has invested a small portion of its securities portfolio in structured notes.
The structured notes in which FSBW has invested provide for periodic
adjustments in coupon rates or prepayments based on various indices and
formulae. At March 31, 1999, structured notes, which totaled $4.0 million at
fair value ($4.0 million at amortized cost), consisted of a U.S. Government
agency obligation which mature in 2004 and 2005. In addition, most of the
U.S. Government agency obligations owned by the Company include call features
which allow the issuing agency the right to call the securities at various
dates prior to the final maturity.
21
<PAGE>
Off Balance Sheet Derivatives: Derivatives include "off balance sheet"
financial products whose value is dependent on the value of an underlying
financial asset, such as a stock, bond, foreign currency, or a reference rate
or index. Such derivatives include "forwards," "futures," "options" or
"swaps." The Company generally has not invested in "off balance sheet"
derivative instruments, although investment policies authorize such
investments. On March 31, 1999 the Company had no off balance sheet
derivatives and no outstanding commitments to purchase or sell securities.
22
<PAGE>
The following tables sets forth certain information regarding carrying values
and percentage of total carrying values, which is estimated market value, of
the Company's consolidated portfolio of securities classified as available for
sale and held to maturity (in thousands).
At March 31
-------------------------------------------------------
Available for Sale: 1999 1998 1997
- ------------------- ------------------ ------------------ -----------------
Percent Percent Percent
Carrying of Carrying of Carrying of
Value Total Value Total Value Total
-------- ----- -------- ------ -------- ------
U.S. Government
Treasury and
agency obligations $ 56,518 15.61% $ 65,594 21.69% $ 67,417 24.45%
Municipal bonds
(tax exempt) 32,259 8.91 32,093 10.61 33,969 11.81
Municipal bonds
(taxable) 2,833 0.78 -- .-- -- .--
Corporate bonds 24,335 6.72 4,304 1.42 7,997 2.78
Other 3,441 0.95 3,298 1.09 3,758 1.31
Mortgage-backed or
related securities
Mortgage-backed
securities:
GNMA 22,508 6.22 16,862 5.58 20,273 7.05
FHLMC 3,502 0.97 3,361 1.11 3,868 1.35
FNMA 6,841 1.89 6,048 2.00 7,281 2.53
------- ----- -------- ------ -------- ------
Total mortgage-
backed securities 32,851 9.08 26,271 8.69 31,422 10.93
Mortgage-related
securities
CMOs-agency backed 145,299 40.14 146,300 48.38 117,212 40.77
CMOs-Non-agency 64,485 17.81 24,559 8.12 25,741 8.95
------- ----- -------- ------ -------- ------
Total mortgage-
related securities 209,784 57.95 170,859 56.50 142,953 49.72
------- ----- -------- ------ -------- ------
Total 242,635 67.03 197,130 65.19 174,375 60.65
------- ----- -------- ------ -------- ------
Total securities
available for sale $362,021 100.00% $302,419 100.00% $287,516 100.00%
======== ====== ======== ====== ======== ======
HELD TO MATURITY:
Municipal bonds
(tax exempt) $ 1,991 92.39% $ -- --% -- --%
CMOs - agency backed 164 7.61 -- -- -- --
Certificates of
deposit -- -- 194 100.00% 987 100.00
-------- ----- -------- ------ -------- ------
Total $ 2,155 100.00% $ 194 100.00% $ 987 100.00%
======== ====== ======== ====== ======== ======
Estimated market
value $ 2,235 $ 194 $ 987
======== ======== ========
23
<PAGE>
<TABLE>
The following table shows the maturity or period to repricing of the Company's consolidated portfolio of
securities (dollars in thousands):
At March 31 1999
-------------------------------------------------------------------------------------------------
Over One to Over Five to Over Ten to Over
One Year or Less Five Years Ten Years Twenty Years Twenty Years Total
---------------- --------------- --------------- --------------- ---------------- ----------------
Weight- Weight- Weight- Weight- Weight- Weight-
Carry- ed Carry- ed Carry- ed Carry- ed Carry- ed Carry- ed
ing Average ing Average ing Average ing Average ing Average ing Average
Value Yield Value Yield Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available
for sale
--------
U. S.
Government
Treasury
and agency
obligations
Fixed-
rate $ 5,519 5.59% $43,836 5.86% $ 2,999 6.14% $ -- --% $ -- -- % $ 52,354 5.93%
Adjustable-
rate 4,164 5.69 -- -- -- -- -- -- -- -- 4,164 5.69
-------- ---- ------- ---- ------- ---- ------- ---- -------- ---- -------- ----
9,683 5.63 43,836 5.86 2,999 6.14 -- -- -- -- 56,518 5.91
Municipal
bonds-
taxable -- -- -- -- 1,029 6.68 1,555 8.08 249 5.05 2,833 7.29
Municipal
bonds-
exempt 1,878 5.29 4,875 5.59 12,854 6.32 9,230 6.94 3,422 5.52 32,259 6.23
-------- ---- ------- ---- ------- ---- ------- ---- -------- ---- -------- ----
1,878 5.29 4,875 5.59 13,883 6.35 10,785 7.10 3,671 5.49 35,092 6.32
Corporate bonds
Fixed-rate 11,380 5.90 4,021 5.81 3,005 6.49 -- -- 5,929 7.26 24,335 5.51
Mortgage-backed
obligations:
Fixed-rate -- -- 406 6.12 371 9.04 1,466 10.12 23,841 6.70 26,084 6.92
Adjustable-
rate 6,135 6.71 632 6.54 -- -- -- -- -- -- 6,767 6.70
-------- ---- ------- ---- ------- ---- ------- ----- -------- ---- -------- ----
6,135 6.71 1,038 6.38 371 9.04 1,466 10.12 23,841 6.70 32,851 6.87
Mortgage-related
obligations:
Fixed-rate 422 10.55 -- -- 3,535 6.89 5,525 6.09 91,800 6.89 101,282 6.86
Adjustable-
rate 108,502 5.37 -- -- -- -- -- -- -- -- 108,502 5.37
-------- ---- ------- ---- ------- ---- ------- ---- -------- ---- -------- ----
108,924 5.39 -- -- 3,535 6.89 5,525 6.09 91,800 6.89 209,784 6.09
-------- ---- ------- ---- ------- ---- ------- ---- -------- ---- -------- ----
Total
mortgage-
backed
or
related
obliga-
tions 115,059 5.46 1,038 6.38 3,906 7.09 6,991 6.94 115,641 6.85 242,635 6.20
Other--
stock 37 6.25 3,404 8.80 -- -- -- -- -- -- 3,441 8.77
-------- ---- ------- ---- ------- ---- ------- ---- -------- ---- -------- ----
Total
securities
available
for
sale--
carrying
value $138,037 5.54% $57,174 6.02% $23,793 6.17% $17,776 6.33% $125,241 6.82% $362,021 6.08%
======== ======= ======= ======= ======== ========
Total
securities
available
for sale--
amortized
cost $194,654 $ 35,833 $24,888 $18,472 $ 24,499 $298,346
======== ======= ======= ======= ======== ========
24
</TABLE>
<PAGE>
<TABLE>
Held to
Maturity
- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-
related
obligation
fixed rate -- -- -- -- -- -- -- 164 5.73 164 5.73
Municipal
bonds-
exempt 285 6.54 1,172 7.45 434 7.80 100 10.00 -- -- 1,991 7.52
Fixed-
rate $ 285 6.54% $ 1,172 7.45% $ 434 7.80% $ 100 10.00% $ 164 5.73% $ 2,155 7.39%
======== ======= ======= ======= ======== ========
25
</TABLE>
<PAGE>
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
General: Deposits, FHLB advances (or borrowings) and loan repayments are the
major sources of the Banks' funds for lending and other investment purposes.
Scheduled loan repayments are a relatively stable source of funds, while
deposit inflows and outflows and loan prepayments are influenced significantly
by general interest rates and money market conditions. Borrowings may be used
on a short-term basis to compensate for reductions in the availability of
funds from other sources. They may also be used on a longer-term basis for
general business purposes. The Banks do not currently solicit brokered
deposits.
Deposit Accounts: Deposits are attracted from within the Banks' primary market
areas through the offering of a broad selection of deposit instruments,
including demand checking accounts, NOW accounts, money market deposit
accounts, regular savings accounts, certificates of deposit and retirement
savings plans. Deposit account terms vary according to the minimum balance
required, the time periods the funds must remain on deposit and the interest
rate, among other factors. In determining the terms of their deposit accounts,
the Banks consider current market interest rates, profitability to the Banks,
matching deposit and loan products and their customer preferences and
concerns. The Banks generally review their deposit mix and pricing weekly.
The Banks compete with other financial institutions and financial
intermediaries in attracting deposits. Competition from mutual funds has been
particularly strong in recent years due to the performance of the stock
market. In addition, there is strong competition for savings dollars from
commercial banks, credit unions, and nonbank corporations, such as securities
brokerage companies and other diversified companies, some of which have
nationwide networks of offices.
The Banks, especially FSBW, have been most successful in attracting a broad
range of retail time deposits and, at March 31, 1999, the Banks had a total of
$580.0 million in retail time deposits, of which $276.7 million had original
maturities of one year or longer.
As illustrated in the following table, certificates of deposit have accounted
for a larger percentage of the deposit portfolio than have other transaction
accounts. However, as reflected in the balances and percentages for March 31,
1999, 1998 and 1997, the acquisition of IEB, TB and WSB has added
significantly to demand, NOW and Money Market accounts for the Company.
26
<PAGE>
<TABLE>
The following table sets forth the balances of deposits in the various types of accounts offered by the
Banks at the dates indicated (in thousands).
AT MARCH 31
------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ----------------------------- ------------------
% OF INCREASE % OF INCREASE % OF
AMOUNT TOTAL (DECREASE) AMOUNT TOTAL (DECREASE) AMOUNT TOTAL
-------- ------ -------- -------- ------ --------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Demand and NOW checking $179,609 18.89% 67,420 $112,189 18.62% $7,820 $104,369 18.78%
Regular savings accounts 59,133 6.22 17,049 42,084 6.99 (2,047) 44,131 7.94
Money market accounts 132,077 13.89 55,435 76,642 12.72 (227) 76,869 13.83
Certificates which mature:
Within 1 year 405,306 42.63 165,232 240,074 39.84 27,221 212,853 38.31
After 1 year, but within
2 years 93,343 9.82 18,824 74,519 12.37 20,966 53,553 9.64
After 2 years, but within
5 years 71,832 7.55 28,327 43,505 7.32 2,542 40,963 7.37
Certificates maturing
thereafter 9,548 1.00 (3,961) 13,509 2.24 (9,459) 22,968 4.13
-------- ------ ------- -------- ------ ------- -------- ------
Total $950,848 100.00% 348,326 $602,522 100.00% $46,816 $555,706 100.00%
======== ======= -====== ======== ====== ======= ======== ======
</TABLE>
The following table sets forth the deposit activities of the Banks for the
periods indicated (in thousands).
YEAR ENDED MARCH 31,
----------------------------
1999 1998 1997
------ ------ ------
Beginning balance $602,522 $555,706 $383,070
Acquisitions 218,368 - 134,610
Net increase (decrease)
before interest credited 95,939 21,527 16,290
Interest credited 34,019 25,289 21,736
-------- -------- --------
Net increase in savings deposits 348,326 46,816 172,636
-------- -------- --------
Ending balance $950,848 $602,522 $555,706
======== ======== ========
The following table indicates the amount of the Banks' jumbo certificates of
deposit by time remaining until maturity as of March 31, 1999. Jumbo
certificates of deposit require a minimum deposit of $100,000 and rates paid
on such accounts are negotiable (in thousands).
Jumbo
MATURITY PERIOD Certificates
of Deposits
-----------
Six months or less $ 90,248
Six through twelve months 51,946
Over twelve months 43,895
---------
Total $ 186,089
=========
27
<PAGE>
Borrowings: Deposits are the primary source of funds for the Banks' lending
and investment activities and for their general business purposes. FSBW also
uses borrowings to supplement its supply of lendable funds, to meet deposit
withdrawal requirements and to more effectively leverage its capital position.
The FHLB-Seattle serves as FSBW's primary borrowing source. Advances from the
FHLB-Seattle are typically secured by FSBW's first mortgage loans. At March
31, 1999, FSBW had $408.3 million of borrowings from the FHLB-Seattle at a
weighted average rate of 5.74%. FSBW has been authorized by the FHLB-Seattle
to borrow up to 45% of it's total assets under a blanket floating lien
security agreement, permitting a borrowing capacity of $537.1 million at March
31, 1999. Additional funds may be obtained through commercial banking credit
lines.
The FHLB-Seattle functions as a central reserve bank providing credit for
member financial institutions. As a member, FSBW is required to own capital
stock in the FHLB-Seattle and is authorized to apply for advances on the
security of such stock and certain of its mortgage loans and other assets
(principally securities which are obligations of, or guaranteed by, the U.S.
Government) provided certain creditworthiness standards have been met.
Advances are made pursuant to several different credit programs. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based on the financial
condition of the member institution and the adequacy of collateral pledged to
secure the credit.
FSBW also uses retail repurchase agreements due generally within 90 days as a
source of funds. At March 31, 1999, retail repurchase agreements totaling $5.8
million with interest rates from 4.90% to 7.18% were secured by a pledge of
certain FNMA, GNMA and FHLMC mortgage-backed securities with a market value of
$9.8 million.
FSBW also borrows funds through the use of secured wholesale repurchase
agreements with securities brokers. The broker holds FSBW's securities while
FSBW continues to receive the principal and interest payments from the
security. FSBW's outstanding borrowings at March 31, 1999, under wholesale
repurchase agreements, totaled $72.7 million and were collateralized by
mortgage-backed securities with a fair value of $75.2 million.
(See "Management's Discussion and Analysis of Financial Position and Results
of Operations -- Liquidity and Capital Resources," and Notes 11 and 12 of the
consolidated Financial Statements)
PERSONNEL
As of March 31, 1999, the Company had 429 full-time and 72 part-time
employees. The employees are not represented by a collective bargaining
unit. The Company believes its relationship with its employees is good.
TAXATION
FEDERAL TAXATION
General. For tax reporting purposes, the Company and the Banks report their
income on a calendar year basis using the accrual method of accounting. The
Company and the Banks are subject to federal income taxation in the same
manner as other corporations with some exceptions including particularly the
reserve for bad debts discussed below. The following discussion of tax matters
is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Company and the Banks.
Bad Debt Reserve. Historically, savings institutions such as FSBW which met
certain definitional tests primarily related to their assets and the nature of
their business ("qualifying thrift") were permitted to establish a reserve for
bad debts and to make annual additions thereto, which may have been deducted
in arriving at their taxable income. FSBW's deductions with respect to
"qualifying real property loans," which are generally loans secured by certain
interests in real property, were computed using an amount based on FSBW's
actual loss experience, or a percentage equal to 8% of FSBW's taxable income,
computed with certain modifications and reduced by the amount of any permitted
additions to the non-qualifying reserve. Due to FSBW's loss experience, it
generally recognized a bad debt deduction equal to 8% of taxable income.
28
<PAGE>
In August 1996, provisions repealing the current thrift bad debt rules were
enacted by Congress as part of "The Small Business Job Protection Act of
1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also require that all institutions
recapture all or a portion of their bad debt reserves added since the base
year (last taxable year beginning before January 1, 1988). FSBW has previously
recorded a deferred tax liability equal to the bad debt recapture and as such
the new rules will have no effect on the net income or federal income tax
expense. For taxable years beginning after December 31, 1995, because FSBW is
a "large" bank (i.e., assets in excess of $500 million), FSBW's bad debt
deduction will be determined on the basis of net charge-offs during the
taxable year. The new rules also require FSBW to recapture its $1.5 million
post-1987 additions to tax basis bad debt reserves ratably over a six taxable
year period beginning with fiscal year March 1999. The recapture of the
post-1987 additions to tax basis bad debt reserves will require FSBW to pay
approximately $85,000 a year in federal income taxes (based upon current
federal income tax rates). This will not result in a charge to earnings as
these amounts are included in the deferred tax liability at March 31, 1999.
The unrecaptured base year reserves will not be subject to recapture as long
as the institution qualifies as a bank as defined by the statute. In addition,
the balance of the pre-1988 bad debt reserves continues to be subject to
provisions of present law referred to below that require recapture in the case
of certain excess distributions to shareholders.
DISTRIBUTIONS. To the extent that FSBW makes "nondividend distributions" to
the Company, such distributions will be considered to result in distributions
from the balance of their bad debt reserves as of December 31, 1987 (or a
lesser amount if FSBW's loan portfolio decreased since December 31, 1987) and
then from the supplemental reserve for losses on loans ("Excess
Distributions"), and an amount based on the Excess Distributions will be
included in FSBW's taxable income. Nondividend distributions include
distributions in excess of FSBW's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of FSBW's current or
accumulated earnings and profits, as calculated for federal income tax
purposes, will not be considered to result in a distribution from FSBW's bad
debt reserves.
The amount of additional taxable income created from an Excess Distribution is
an amount that, when reduced by the tax attributable to the income, is equal o
the amount of the distribution. Thus, approximately one and one-half times the
Excess Distribution would be includable in gross income for federal income tax
purposes, assuming a 34% federal corporate income tax rate. FSBW does not
intend to pay dividends that would result in a recapture of any portion of
their tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. AMTI is increased by an
amount equal to 75% of the amount by which the corporation's adjusted current
earnings exceeds its AMTI (determined without regard to this preference and
prior to reduction for net operating losses). For taxable years beginning
after December 31, 1986, and before January 1, 1996, an environmental tax of
.12% of the excess of AMTI (with certain modification) over $2.0 million is
imposed on corporations, including the Banks, whether or not an Alternative
Minimum Tax ("AMT")is paid. Under President Clinton's 1999 budget proposal,
the corporate environmental income tax would be reinstated for taxable years
beginning after December 31, 1996 and before January 1, 2008.
Dividends-Received Deduction and Other Matters. The Company may exclude from
its income 100% of dividends received from the Banks as a member of the same
affiliated group of corporations. The corporate dividends-received deduction
is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Banks will not file a consolidated
tax return, except that if the Company or the Banks own more than 20% of the
stock of a corporation distributing a dividend, then 80%of any dividends
received may be deducted.
There have not been any IRS audits of the Company's or the Banks' federal
income tax returns during the past five years.
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ENVIRONMENTAL REGULATION
The business of the Company is affected from time to time by federal and state
laws and regulations relating to hazardous substances. Under the federal
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA),
owners and operators of properties containing hazardous substances may be
liable for the costs of cleaning up the substances. CERCLA and similar state
laws can affect the Company both as an owner of branches and other properties
used in its business and as a lender holding a security interest in property
which is found to contain hazardous substances. While CERCLA contains an
exemption for holders of security interests, the exemption is not available if
the holder participates in the management of a property, and some courts have
broadly defined what constitutes participation in management of property.
Moreover, CERCLA and similar state statutes can affect the Company's decision
of whether or not to foreclose on a property. Before foreclosing on commercial
real estate, it is the Company's general policy to obtain an environmental
report, thereby increasing the costs of foreclosure. In addition, the
existence of hazardous substances on a property securing a troubled loan may
cause the Company to elect not to foreclose on the property, thereby reducing
the Company's flexibility in handling the loan.
COMPETITION
The Banks encounter significant competition both in attracting deposits and in
originating real estate loans. Their most direct competition for deposits has
come historically from other commercial and savings banks, savings
associations and credit unions in their market areas. More recently, the Banks
have experienced an increased level of competition from securities firms,
insurance companies, money market and mutual funds, and other investment
vehicles. The Banks expect continued strong competition from such financial
institutions and investment vehicles in the foreseeable future. The ability of
the Banks to attract and retain deposits depends on their ability to provide
investment opportunities that satisfy the requirements of investors as to rate
of return, liquidity, risk of loss of principal, convenience of locations and
other factors. The Banks compete for deposits by offering depositors a variety
of deposit accounts and financial services at competitive rates, convenient
business hours, and a high level of personal service and expertise.
The competition for loans comes principally from commercial banks, loan
brokers, mortgage banking companies, other savings banks and credit unions.
The competition for loans has increased substantially in recent years as a
result of the large number of institutions competing in the Banks' market
areas as well as the increased efforts by commercial banks and credit unions
to expand mortgage loan originations.
The Banks compete for loans primarily through offering competitive rates and
fees and providing excellent services to borrowers and home builders. Factors
that affect competition include general and local economic conditions, current
interest rate levels and the volatility of the mortgage markets.
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REGULATION
THE BANKS
General: As state-chartered, federally insured financial institutions, the
Banks are subject to extensive regulation. Lending activities and other
investments must comply with various statutory and regulatory requirements,
including prescribed minimum capital standards. The Banks are regularly
examined by the FDIC and their state banking regulators and file periodic
reports concerning their activities and financial condition with their
regulators. The Banks' relationship with depositors and borrowers also is
regulated to a great extent by both federal and state law, especially in such
matters as the ownership of savings accounts and the form and content of
mortgage documents.
Federal and state banking laws and regulations govern all areas of the
operation of the Banks, including reserves, loans, mortgages, capital,
issuance of securities, payment of dividends and establishment of branches.
Federal and state bank regulatory agencies also have the general authority to
limit the dividends paid by insured banks and bank holding companies if such
payments should be deemed to constitute an unsafe and unsound practice. The
respective primary federal regulators of the Company and the Banks have
authority to impose penalties, initiate civil and administrative actions and
take other steps intended to prevent banks from engaging in unsafe or unsound
practices.
State Regulation and Supervision: As a state-chartered savings bank, FSBW is
subject to applicable provisions of Washington law and regulations. As a state
chartered commercial bank TB is subject to applicable provisions of Washington
law and regulation. As a state-chartered commercial bank, IEB is subject to
applicable provisions of Oregon law and regulations. State law and regulations
govern the Banks' ability to take deposits and pay interest thereon, to make
loans on or invest in residential and other real estate, to make consumer
loans, to invest in securities, to offer various banking services to its
customers, and to establish branch offices. Under state law, savings banks in
Washington also generally have all of the powers that federal mutual savings
banks have under federal laws and regulations. The Banks are subject to
periodic examination and reporting requirements by and of their state banking
regulators.
Deposit Insurance: The FDIC is an independent federal agency that insures the
deposits, up to prescribed statutory limits, of depository institutions. The
FDIC currently maintains two separate insurance funds: the BIF and the SAIF.
As insurer of the Banks' deposits, the FDIC has examination, supervisory and
enforcement authority over the Banks.
FSBW's accounts are insured by the SAIF and IEB's and TB's accounts are
insured by the BIF to the maximum extent permitted by law. The Banks pay
deposit insurance premiums based on a risk-based assessment system established
by the FDIC. Under applicable regulations, institutions are assigned to one of
three capital groups that are based solely on the level of an institution's
capital-- "well capitalized," "adequately capitalized," and
"undercapitalized" -- which are defined in the same manner as the regulations
establishing the prompt corrective action system, as discussed below. These
three groups are then divided into three subgroups which reflect varying
levels of supervisory concern, from those which are considered to be healthy
to those which are considered to be of substantial supervisory concern. The
matrix so created results in nine assessment risk classifications.
Pursuant to the Deposit Insurance Funds Act of 1996 (the "DIF Act"), which was
enacted on September 30, 1996, the FDIC imposed a special assessment on each
depository institution with SAIF-assessable deposits which resulted in the
SAIF achieving its designated reserve ratio. In connection therewith, the FDIC
reduced the assessment schedule for SAIF members, effective January 1, 1997,
to a range of 0% to 0.27%, with most institutions, including FSBW, paying 0%.
This assessment schedule is the same as that for the BIF, which reached its
designated reserve ratio in 1995. In addition, since January 1, 1997, SAIF
members are charged an assessment of .065% of SAIF-assessable deposits for the
purpose of paying interest on the obligations issued by the Financing
Corporation ("FICO") in the 1980s to help fund the thrift industry cleanup.
BIF-assessable deposits will be charged an assessment to help pay interest on
the FICO bonds at a rate of approximately .013% until the earlier of December
31, 1999 or the date upon which the last savings association ceases to exist,
after which time the assessment will be the same for all insured deposits. The
DIF Act provides for the merger of the BIF and the SAIF into the Deposit
Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date.
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The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances that could
result in termination of the deposit insurance of the Banks.
Prompt Corrective Action: Under Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA), each federal banking agency is required to
implement a system of prompt corrective action for institutions which it
regulates. The federal banking agencies have promulgated substantially similar
regulations to implement this system of prompt corrective action. Under the
regulations, an institution shall be deemed to be: (i) "well capitalized" if
it has a total risk-based capital ratio of 10.0% or more, has a Tier I
risk-based capital ratio of 6.0% or more, has a Tier I leverage capital ratio
of 5.0% or more and is not subject to specified requirements to meet and
maintain a specific capital level for any capital measure; (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8.0% or more, has a
Tier I risk-based capital ratio of 4.0% or more, has a Tier I leverage capital
ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the
definition of "well capitalized;" (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 8.0%, has a Tier I risk-based
capital ratio that is less than 4.0% or has a Tier I leverage capital ratio
that is less than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, has a Tier I risk-based capital ratio that is less than 3.0% or has a
Tier I leverage capital ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%.
A federal banking agency may, after notice and an opportunity for a hearing,
reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or engaging
in an unsafe or unsound practice. (The FDIC may not, however, reclassify a
significantly undercapitalized institution as critically undercapitalized.)
An institution generally must file a written capital restoration plan which
meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to various mandatory
and discretionary restrictions on its operations.
At March 31, 1999, the Banks were categorized as "well capitalized" under the
prompt corrective action regulations of the FDIC.
Standards for Safety and Soundness: The federal banking regulatory agencies
have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings and (viii) compensation, fees and benefits (Guidelines). The
Guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the FDIC determines that
either Bank fails to meet any standard prescribed by the Guidelines, the
agency may require the Bank to submit to the agency an acceptable plan to
achieve compliance with the standard. FDIC regulations establish deadlines for
the submission and review of such safety and soundness compliance plans.
Capital Requirements: The FDIC's minimum capital standards applicable to
FDIC-regulated banks and savings banks require the most highly-rated
institutions to meet a "Tier 1" leverage capital ratio of at least 3% of total
assets. Tier 1 (or "core capital") consists of common stockholders' equity,
noncumulative perpetual preferred stock and minority interests in consolidated
subsidiaries minus all intangible assets other than limited amounts of
purchased mortgage servicing rights and certain other accounting adjustments.
All other banks must have a Tier 1 leverage ratio of at least 100-200 basis
points above the 3% minimum. The FDIC capital regulations establish a minimum
leverage ratio of not less than 4% for banks that are not highly rated or are
anticipating or experiencing significant growth.
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Any insured bank with a Tier 1 capital to total assets ratio of less than 2%
is deemed to be operating in an unsafe and unsound condition unless the
insured bank enters into a written agreement, to which the FDIC is a party, to
correct its capital deficiency. Insured banks operating with Tier 1 capital
levels below 2% (and which have not entered into a written agreement) are
subject to an insurance removal action. Insured banks operating with lower
than the prescribed minimum capital levels generally will not receive approval
of applications submitted to the FDIC. Also, inadequately capitalized state
nonmember banks will be subject to such administrative action as the FDIC
deems necessary.
FDIC regulations also require that banks meet a risk-based capital standard.
The risk-based capital standard requires the maintenance of total capital
(which is defined as Tier 1 capital and Tier 2 or supplementary capital) to
risk weighted assets of 8% and Tier 1 capital to risk-weighted assets of 4%.
In determining the amount of risk-weighted assets, all assets, plus certain
off balance sheet items, are multiplied by a risk-weight of 0% to 100%, based
on the risks the FDIC believes are inherent in the type of asset or item. The
components of Tier 1 capital are equivalent to those discussed above under the
3% leverage requirement. The components of supplementary capital currently
include cumulative perpetual preferred stock, adjustable-rate perpetual
preferred stock, mandatory convertible securities, term subordinated debt,
intermediate-term preferred stock and allowance for possible loan and lease
losses. Allowance for possible loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-weighted
assets. Overall, the amount of capital counted toward supplementary capital
cannot exceed 100% of Tier 1 capital.
FDIC capital requirements are designated as the minimum acceptable standards
for banks whose overall financial condition is fundamentally sound, which are
well-managed and have no material or significant financial weaknesses. The
FDIC capital regulations state that, where the FDIC determines that the
financial history or condition, including off-balance sheet risk, managerial
resources and/or the future earnings prospects of a bank are not adequate
and/or a bank has a significant volume of assets classified substandard,
doubtful or loss or otherwise criticized, the FDIC may determine that the
minimum adequate amount of capital for that bank is greater than the minimum
standards established in the regulation.
The Company believes that, under the current regulations, the Banks will
continue to meet their minimum capital requirements in the foreseeable future.
However, events beyond the control of the Banks, such as a downturn in the
economy in areas where the Banks have most of their loans, could adversely
affect future earnings and, consequently, the ability of the Banks to meet
their capital requirements.
Activities and Investments of Insured State-Chartered Banks: Federal law
generally limits the activities and equity investments of FDIC-insured,
state-chartered banks to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally
may not directly or indirectly acquire or retain any equity investment of a
type, or in an amount, that is not permissible for a national bank. An insured
state bank is not prohibited from, among other things, (i) acquiring or
retaining a majority interest in a subsidiary, (ii) investing as a limited
partner in a partnership the sole purpose of which is direct or indirect
investment in the acquisition, rehabilitation or new construction of a
qualified housing project, provided that such limited partnership investments
may not exceed 2% of the bank's total assets, (iii) acquiring up to 10% of the
voting stock of a company that solely provides or reinsures directors',
trustees' and officers' liability insurance coverage or bankers' blanket bond
group insurance coverage for insured depository institutions, and (iv)
acquiring or retaining the voting shares of a depository institution if
certain requirements are met.
Federal law provides that an insured state-chartered bank may not, directly,
or indirectly through a subsidiary, engage as "principal" in any activity that
is not permissible for a national bank unless the FDIC has determined that
such activities would pose no risk to the insurance fund of which it is a
member and the bank is in compliance with applicable regulatory capital
requirements. Any insured state-chartered bank directly or indirectly engaged
in any activity that is not permitted for a national bank must cease the
impermissible activity.
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Federal Reserve System: In 1980, Congress enacted legislation which imposed
Federal Reserve requirements (under "Regulation D") on all depository
institutions that maintain transaction accounts or nonpersonal time deposits.
These reserves may be in the form of cash or non-interest-bearing deposits
with the regional Federal Reserve Bank. NOW accounts and other types of
accounts that permit payments or transfers to third parties fall within the
definition of transaction accounts and are subject to Regulation D reserve
requirements, as are any nonpersonal time deposits at a bank. Under Regulation
D, a bank must establish reserves equal to 3% of the first $47.8 million of
transaction accounts, of which the first $4.4 million is exempt, and 10% on
the remainder. The reserve requirement on nonpersonal time deposits with
original maturities of less than 1-1/2 years is 0%. As of March 31, 1999, the
Banks met their reserve requirements.
Affiliate Transactions: The Company and the Banks are legal entities separate
and distinct. Various legal limitations restrict the Banks from lending or
otherwise supplying funds to the Company (an "affiliate"), generally limiting
such transactions with the affiliate to 10% of the Bank's capital and surplus
and limiting all such transactions to 20% of the Bank's capital and surplus.
Such transactions, including extensions of credit, sales of securities or
assets and provision of services, also must be on terms and conditions
consistent with safe and sound banking practices, including credit standards,
that are substantially the same or at least as favorable to the Banks as those
prevailing at the time for transactions with unaffiliated companies.
Federally insured banks are subject, with certain exceptions, to certain
restrictions on extensions of credit to their parent holding companies or
other affiliates, on investments in the stock or other securities of
affiliates and on the taking of such stock or securities as collateral from
any borrower. In addition, such banks are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit or the
providing of any property or service.
Community Reinvestment Act: Banks are also subject to the provisions of the
Community Reinvestment Act of 1977, which requires the appropriate federal
bank regulatory agency, in connection with its regular examination of a bank,
to assess the bank's record in meeting the credit needs of the community
serviced by the bank, including low and moderate income neighborhoods. The
regulatory agency's assessment of the bank's record is made available to the
public. Further, such assessment is required of any bank which has applied,
among other things, to establish a new branch office that will accept
deposits, relocate an existing office or merge or consolidate with, or acquire
the assets or assume the liabilities of, a federally regulated financial
institution.
Dividends: Dividends from the Banks will constitute the major source of funds
for dividends which may be paid by the Company. The amount of dividends
payable by the Banks to the Company will depend upon the Banks' earnings and
capital position, and is limited by federal and state laws, regulations and
policies.
Federal law further provides that no insured depository institution may make
any capital distribution (which would include a cash dividend) if, after
making the distribution, the institution would be "undercapitalized," as
defined in the prompt corrective action regulations. Moreover, the federal
bank regulatory agencies also have the general authority to limit the
dividends paid by insured banks if such payments should be deemed to
constitute an unsafe and unsound practice.
THE COMPANY
General: The Company is a bank holding company registered with the Federal
Reserve. Bank holding companies are subject to comprehensive regulation by the
Federal Reserve under the Bank Holding Company Act of 1956, as amended (BHCA)
and the regulations of the Federal Reserve. The Company is required to file
with the Federal Reserve annual reports and such additional information as the
Federal Reserve may require and is subject to regular examinations by the
Federal Reserve. The Federal Reserve also has extensive enforcement authority
over bank holding companies, including, among other things, the ability to
assess civil money penalties, to issue cease and desist or removal orders and
to require that a holding company divest subsidiaries (including its bank
subsidiaries). In general, enforcement actions may be initiated for violations
of law and regulations and unsafe or unsound practices.
Under the BHCA, a bank holding company must obtain Federal Reserve approval
before: (1) acquiring, directly or indirectly, ownership or control of any
voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (2) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(3) merging or consolidating with another bank holding company.
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The BHCA also prohibits a bank holding company, with certain exceptions, from
acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company that is not a bank or bank holding company and
from engaging directly or indirectly in activities other than those of
banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
nonbank activities which, by statute or by Federal Reserve regulation or
order, have been identified as activities closely related to the business of
banking or managing or controlling banks. The list of activities permitted by
the Federal Reserve includes, among other things: operating a savings
institution, mortgage company, finance company, credit card company or
factoring company; performing certain data processing operations; providing
certain investment and financial advice; underwriting and acting as an
insurance agent for certain types of credit-related insurance; leasing
property on a full-payout, non-operating basis; selling money orders,
travelers' checks and U.S. Savings Bonds; real estate and personal property
appraising; providing tax planning and preparation services; and, subject to
certain limitations, providing securities brokerage services for customers.
Interstate Banking and Branching.. The Federal Reserve must approve an
application of an adequately capitalized and adequately managed bank holding
company to acquire control of, or acquire all or substantially all of the
assets of, a bank located in a state other than such holding company's home
state, without regard to whether the transaction is prohibited by the laws of
any state. The Federal Reserve may not approve the acquisition of a bank that
has not been in existence for the minimum time period (not exceeding five
years) specified by the statutory law of the host state. Nor may the Federal
Reserve approve an application if the applicant (and its depository
institution affiliates) controls or would control more than 10% of the insured
deposits in the United States or 30% or more of the deposits in the target
bank's home state or in any state in which the target bank maintains a branch.
Federal law does not affect the authority of states to limit the percentage of
total insured deposits in the state which may be held or controlled by a bank
holding company to the extent such limitation does not discriminate against
out-of-state banks or bank holding companies. Individual states may also waive
the 30% state-wide concentration limit contained in the federal law.
The Federal banking agencies are authorized to approve interstate merger
transactions without regard to whether such transaction is prohibited by the
law of any state, unless the home state of one of the banks adopted a law
prior to June 1, 1997 which applies equally to all out-of-state banks and
expressly prohibits merger transactions involving out-of-state banks.
Interstate acquisitions of branches will be permitted only if the law of the
state in which the branch is located permits such acquisitions. Interstate
mergers and branch acquisitions will also be subject to the nationwide and
statewide insured deposit concentration amounts described above.
Dividends: The Federal Reserve has issued a policy statement on the payment of
cash dividends by bank holding companies, which expresses the Federal
Reserve's view that a bank holding company should pay cash dividends only to
the extent that the company's net income for the past year is sufficient to
cover both the cash dividends and a rate of earning retention that is
consistent with the company's capital needs, asset quality and overall
financial condition. The Federal Reserve also indicated that it would be
inappropriate for a company experiencing serious financial problems to borrow
funds to pay dividends.
Bank holding companies, except for certain "well-capitalized" bank holding
companies, are required to give the Federal Reserve prior written notice of
any purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding
12 months, is equal to 10% or more of their consolidated net worth. The
Federal Reserve may disapprove such a purchase or redemption of it determines
that the proposal would constitute an unsafe or unsound practice or would
violate any law, regulation, Federal Reserve order, or any condition imposed
by, or written agreement with, the Federal Reserve.
Capital Requirements: The Federal Reserve has established capital adequacy
guidelines for bank holding companies that generally parallel the capital
requirements of the FDIC for the Banks. The Federal Reserve regulations
provide that capital standards will be applied on a consolidated basis in the
case of a bank holding company with $150 million or more in total consolidated
assets.
The Company's total risk based capital must equal 8% of risk-weighted assets
and one half of the 8% (4%) must consist of Tier 1 (core) capital. As of March
31, 1999 the Company's total risk based capital was 15.15% of risk-weighted
assets and its risk based capital of Tier 1 (core) capital was 13.99% of
risk-weighted assets.
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MANAGEMENT PERSONNEL
EXECUTIVE OFFICERS
The following table sets forth information with respect to the executive
officers of the Company.
NAME AGE (1) POSITION WITH COMPANY POSITION WITH BANKS
- ---- ------- --------------------- -------------------
Gary Sirmon 55 Chief Executive Officer, FSBW-Chief Executive
President and Director Officer, President and
Director, IEB,
TB-Director
D. Allan Roth 62 Secretary/Treasurer FSBW - Executive Vice
Executive Vice President President and Chief
Financial Officer
Michael K. Larsen 56 Executive Vice President FSBW - Executive Vice
President and Chief
Lending Officer
Jesse G. Foster 60 Director IEB-Chief Executive
Officer,
President and Director
Lloyd Baker 50 Senior Vice President FSBW-Senior Vice
President
S. Rick Meikle 51 Director TB-Chief Executive
Officer,
President and Director
- ----------------
(1) As of March 31, 1999.
BIOGRAPHICAL INFORMATION
Set forth is certain information regarding the executive officers of the
Company, directors or executive officers. There are no family relationships
among or between the directors or executive officers.
Gary Sirmon is Chief Executive Officer, President and a Director of the
Company and FSBW; and a Director of IEB and TB. He joined FSBW in 1980 as an
Executive Vice President and assumed his current position in 1982.
D. Allan Roth is Executive Vice President and Chief Financial Officer of FSBW
and is Secretary/Treasurer and an Executive Vice President of the Company. He
joined FSBW in 1965.
Michael K. Larsen is Executive Vice President and Chief Lending Officer of
FSBW and is an Executive Vice President of the Company. He joined FSBW in
1981.
Jesse G. Foster is the Chief Executive Officer, President and a Director of
IEB and a Director of the Company. He joined IEB in 1962.
Lloyd Baker is a Senior Vice President with FSBW and is an Senior Vice
President of the Company. He joined FSBW in 1995 as a Vice President.
S. Rick Meikle is Chief Executive Officer, President and a Director of TB and
a Director of the Company. He helped form TB in 1991.
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ITEM 2 - Properties
The Company's home office, which is owned by the Company, is located in Walla
Walla, Washington. First Savings has, in total, 21 branch offices, including
five WSB offices, all of which are located in the State of Washington. These
offices are located in the cities of Walla Walla (4), Kennewick (2), Richland,
Clarkston, Sunnyside, Yakima (4), Selah, Wenatchee, Dayton, Bellingham,
Ferndale, Lynden, Blaine and Point Roberts. Of these offices, 14 are owned by
the Company and seven are leased. The leases expire from 2000 through 2002. In
addition to these, First Savings has four leased loan production offices in
Bellevue, Spokane, Puyallup, and Oak Harbor, Washington. The leases expire
from 1999 through 2000. The acquisition of Seaport Citizens' Bank on April
1, 1999 added two more branch offices which are owned located in Lewiston,
Idaho. IEB's main office is located in Hermiston, Oregon and is owned by the
Company. IEB has, in total, four branch offices and a drive-up facility, all
of which are located in the State of Oregon. These offices, which are owned by
the Company, are located in Pendleton, Umatilla, Boardman and Stanfield. IEB
also has a remote drive-up facility in Hermiston, which is owned, and two loan
production offices in Condon and La Grande, which are on month-to-month
leases. IEB also leases two facilities in Hermiston for its mortgage division
and for its information systems. Towne Bank operates from six branch
locations all of which are leased TB offices and are located in Woodinville,
Bellevue, Redmond, Bothell, Renton and Kirkland, Washington. The Company's net
investment in its offices, premises, equipment and leaseholds was $16.0
million at March 31, 1999.
ITEM 3 - LEGAL PROCEEDINGS
Periodically, there have been various claims and lawsuits involving the Banks,
mainly as a defendant, such as claims to enforce liens, condemnation
proceedings on properties in which the Banks hold security interests, claims
involving the making and servicing of real property loans and other issues
incident to the Banks' business. The Company and the Banks are not a party to
any pending legal proceedings that it believes would have a material adverse
effect on the financial condition or operations of the Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Stock Listing
First Washington Bancorp, Inc. common stock is traded over-the-counter on
the Nasdaq National Market under the symbol "FWWB." Newspaper stock tables
list the company as "FSBWA." Stockholders of record at March 31, 1999
totaled 781. This total does not reflect the number of persons or
entitles who hold stock in nominee or "street" name through various
brokerage firms. The following tables show the reported high and low sale
prices of the Company's common stock for the four year period ended March 31,
1999.
CASH
DIVIDENDS
FISCAL 1999 HIGH LOW DECLARED
----------- ----- ----- --------
First quarter(1) $25.34 $21.81 $0.082
Second quarter 23.64 19.38 0.090
Third quarter 24.00 19.88 0.090
Fourth quarter 24.00 18.38 0.120
CASH
DIVIDENDS
FISCAL 1998(1) HIGH LOW DECLARED
----------- ---- --- --------
First quarter $20.23 $17.05 $0.064
Second quarter 22.62 19.66 0.064
Third quarter 25.96 21.14 0.064
Fourth quarter 25.12 21.36 0.082
CASH
DIVIDENDS
FISCAL 1997(1) HIGH LOW DECLARED
----------- ---- --- --------
First quarter $14.21 $12.16 $0.045
Second quarter 15.68 13.18 0.045
Third quarter 17.27 15.05 0.045
Fourth quarter 20.12 16.36 0.064
CASH
DIVIDENDS
FISCAL 1996 *(1) HIGH LOW DECLARED
----------- ---- --- --------
Third quarter $12.05 $11.31 $0.045
Fourth quarter 12.27 11.25 0.045
* Year of Conversion
(1) Restated to reflect 10% stock dividend granted in August 1998, see Note 1
38
<PAGE>
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
These tables set forth selected consolidated financial and other data of the
Company at the dates and for the periods indicated. This information is
derived from and is qualified in its entirety by reference to the detailed
information and Consolidated Financial Statements and Notes thereto presented
elsewhere in this or prior filings. Information for the March 31, 1995 fiscal
year is for FSBW's former mutual holding company.
FINANCIAL CONDITION DATA: At March 31 (2)
-----------------------------------------------------
(In thousands) 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Total assets $1,631,900 $1,154,072 $1,007,633 $743,176
$491,368
Loans receivable, net 1,102,669 756,917 645,881 415,295
299,403
Cash and securities (1) 436,679 345,142 312,991 302,772
175,505
Deposits 950,848 602,522 555,706 383,070
367,368
Borrowings 486,719 389,272 293,700 199,071
70,338
Equity 183,608 150,184 148,636 154,142
50,251
Shares outstanding excluding
unearned, restricted shares
held in ESOP 10,902 10,160 10,718 11,085 N/A
OPERATING DATA: At or for the Years Ended March 31 (2)
--------------------------------------------------
(In thousands, except per
share data)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Interest income $112,292 $85,147 $67,292 $41,409 $33,652
Interest expense 60,442 46,651 36,372 23,287 18,230
------- ------- ------- ------- -------
Net interest income 51,850 38,496 30,920 18,122 15,422
Provision for loan losses 2,841 1,628 1,423 524 391
------- ------- ------- ------- -------
Net interest income after
provision for loan losses 49,009 36,868 29,497 17,598 15,031
Gains (losses) from sale of
loans and securities 2,895 1,379 686 387 (121)
Other operating income 4,558 3,341 2,384 1,216 1,180
Other operating expense 31,745 21,020 19,330 10,318 9,983
------- ------- ------- ------- ------
Income before provision for
income taxes and cumulative
effect of change in accounting 24,717 20,568 13,237 8,883 6,107
Provision for income taxes 9,277 7,446 3,923 2,631 1,335
------- ------- ------- ------- -------
Income before cumulative effect
of change in accounting 15,440 13,122 9,314 6,252 4,772
Cumulative effect of change in
accounting (3) -- -- -- -- 396
-------- -------- -------- ------- --------
Net income $15,440 $13,122 $9,314 $6,252 $5,168
======= ======= ======== ======= ======
PER SHARE DATA (4):
Net income: Basic $ 1.46 $ 1.30 $ 0.88 N/A N/A
Diluted 1.40 1.25 0.87
Stockholders' equity (5) 16.84 14.78 13.87
Cash dividends 0.38 0.27 0.20
Dividend payout ratio (diluted) 27.14% 21.60% 22.99%
(footnotes on following page)
39
<PAGE>
KEY FINANCIAL RATIOS:
AT OR FOR THE YEARS ENDED MARCH 31(2)
-------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Performance Ratios:
Return on average assets (6) 1.08% 1.21% 1.04% 1.11% 1.12%
Return on average equity (7) 8.91 8.70 6.30 6.62 10.85
Average equity to average assets 12.07 13.86 16.58 16.75 10.34
Interest rate spread (8) 3.45 3.13 2.88 2.49 3.05
Net interest margin (9) 3.83 3.68 3.59 3.33 3.47
Non-interest income to average assets 0.52 0.43 0.34 0.28 0.24
Non-interest expense to average assets 2.21 1.93 2.17 1.83 2.16
Efficiency ratio (10) 53.53 48.64 56.87 52.31 60.57
Average interest-earning assets
to interest-bearing liabilities 108.30 112.53 116.97 119.80 110.31
Asset Quality Ratios:
Allowance for loan losses as a
percent of net loans at end of period 1.10 1.03 0.94 0.97 1.17
Net charge-offs as a percent of average
outstanding loans during the period 0.14 0.08 0.04 0.01 0.10
Non-performing assets as a percent
of total assets 0.57 0.20 0.31 0.17 0.19
Ratio of allowance for loan losses
as a percent of non-performing
loans (11) 1.60 5.53 3.20 7.53 10.41
Consolidated Capital Ratio:
Tier 1 leverage capital ratio 9.44 12.17 13.68 20.78 10.19
- ---------------
Footnotes:
(1) Includes securities available for sale and held to maturity.
(2) Certain amounts in the prior periods' financial statements have been
reclassified to conform to the current period's presentation. These
reclassifications have affected certain ratios for the prior periods.
The effect of such reclassifications is immaterial.
(3) Adjustment net of taxes of $204,000 due to the adoption of SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities.
(4) FSBW converted from mutual to stock ownership on October 31, 1995,
therefore data is not meaningful for fiscal years prior to March 31,
1996. Per share data have been adjusted for the 10% stock dividend paid
in August 1998.
(5) Calculated using shares outstanding excluding unearned restricted shares
held in ESOP.
(6) Net income divided by average assets.
(7) Net income divided by average equity.
(8) Difference between the average yield on interest-earning assets and the
average cost of interest-bearing liabilities.
(9) Net interest income before provision for loan losses as a percent of
average interest-earning assets.
(10) Other operating expenses divided by the total of net interest income
before loan losses and other operating income (non-interest income).
(11) Non-performing loans consist of nonaccrual and 90 days past due loans.
40
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis (MD&A) and other portions of this report
contain certain "forward-looking statements" concerning the future operations
of First Washington Bancorp, Inc. Management desires to take advantage of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995 and is including this statement for the express purpose of availing the
Company of the protections of such safe harbor with respect to all "forward-
looking statements" contained in our Annual Report. We have used "forward-
looking statements" to describe future plans and strategies, including our
expectations of the Company's future financial results. Management's ability
to predict results or the effect of future plans or strategies is inherently
uncertain. Factors which could affect actual results include interest rate
trends, the general economic climate in the Company's market area and the
country as a whole, the ability of the Company to control costs and expenses,
the ability of the Company to efficiently incorporate acquisitions into its
operations, the ability of the Company to successfully address Year 2000 (Y2K)
issues, competitive products and pricing, loan delinquency rates, and changes
in federal and state regulation. These factors should be considered in
evaluating the "forward-looking statements," and undue reliance should not be
placed on such statements.
GENERAL
First Washington Bancorp, Inc. (the Company or FWWB), a Washington
corporation, is primarily engaged in the business of planning, directing and
coordinating the business activities of its wholly owned subsidiaries,
First Savings Bank of Washington (FSBW), Inland Empire Bank (IEB) and Towne
Bank (TB) (together, the Banks). FSBW is a Washington-chartered savings
bank the deposits of which are insured by the Federal Deposit Insurance
Corporation (FDIC) under the Savings Association Insurance Fund (SAIF).
FSBW conducts business from its main office in Walla Walla, Washington and its
16 branch offices and three loan production offices located in southeast,
central, north central and western Washington.. Effective January 1, 1999,
FWWB completed the acquisition of Whatcom State Bancorp whose wholly owned
subsidiary, Whatcom State Bank (WSB), was merged with FSBW and operates as
Whatcom State Bank, a Division of First Savings Bank of Washington. WSB,
which is based in Bellingham, operates five full service branches and a
loan office in northwest Washington. IEB is an Oregon-chartered commercial
bank whose deposits are insured by the FDIC under the Bank Insurance Fund
(BIF). IEB conducts business from its main office in Hermiston, Oregon and its
five branch offices and two loan production offices located in northeast
Oregon. TB is a Washington-chartered commercial bank whose deposits are
insured by the FDIC under BIF. TB conducts business from six full service
branches in the Seattle, Washington, metropolitan area.
The operating results of FWWB depend primarily on its net interest income,
which is the difference between interest income on interest-earning assets,
consisting of loans and investment securities, and interest expense on
interest-bearing liabilities, composed primarily of savings deposits and
Federal Home Loan Bank (FHLB) advances. Net interest income is primarily a
function of FWWB's interest rate spread, which is the difference between
the yield earned on interest-earning assets and the rate paid on interest-
bearing liabilities, as well as a function of the average balance of interest-
earning assets as compared to the average balance of interest-bearing
liabilities. As more fully explained below, FWWB's net interest income
significantly increased for the year ended March 31, 1999, when compared to
the same periods for the prior years. This increase in net interest income was
largely due to the substantial growth in average asset and liability balances
from the acquisition of TB on April 1, 1998, although significant asset and
liability growth also occurred at IEB and FSBW, especially with the
acquisition of Whatcom State Bancorp on January 1, 1999. FWWB's net income
also is affected by provisions for loan losses and the level of its other
income, including deposit service charges, loan origination and servicing
fees, and gains and losses on the sale of loans and securities, as well as its
non-interest operating expenses and income tax provisions. FWWB's net income
also significantly increased when compared to the same periods for the prior
year.
Management's discussion and analysis of results of operations is intended to
assist in understanding the financial condition and results of operations of
the Company. The information contained in this section should be read in
conjunction with the Consolidated Financial Statements and accompanying
Selected Notes to Consolidated Financial Statements.
41
<PAGE>
RECENT DEVELOPMENTS AND SIGNIFICANT EVENTS SINCE MARCH 31, 1998
Reincorporation:
The stockholders of First Savings Bank of Washington Bancorp, Inc., a Delaware
corporation and herein referred to as "FSBWB," approved the reincorporation of
FSBWB from Delaware to Washington on July 24, 1998. The reincorporation was
effected July 24, 1998 by merging FSBWB into a wholly owned subsidiary which
had been recently formed solely for the purpose of effecting the
reincorporation. The surviving corporation is known as First Washington
Bancorp, Inc., a Washington corporation. Upon consummation of the merger, each
share of Common Stock of FSBWB, par value $.01 per share, was automatically
converted into one share of common stock of FWWB, par value $.01 per share.
The merger was consummated under the terms and conditions of a Plan of Merger
pursuant to which FSBWB ceased to exist as a Delaware corporation, the
stockholders of FSBWB became shareholders of FWWB, FWWB succeeded to all the
assets, liabilities, subsidiaries and other properties of FSBWB to the full
extent provided by law, and the rights of the shareholders and internal
affairs of FWWB are to be governed by the articles of incorporation and bylaws
of FWWB and the Washington Business Corporation Act, as amended. As a result
of the merger, FWWB has the same business, management, benefit plans,
location, assets, liabilities and net worth as did FSBWB.
Declaration of 10% Stock Dividend:
On July 24, 1998 FWWB's Board of Directors declared a 10% stock dividend
payable August 17, 1998 to shareholders of record on August 10, 1998. All
earnings per share and share data have been adjusted to reflect the 10% stock
dividend.
Acquisition of Towne Bancorp, Inc.:
On April 1, 1998 FWWB completed the acquisition of Towne Bancorp, Inc. FWWB
paid $28.2 million in cash and common stock for all of the outstanding common
shares and stock options of Towne Bancorp, Inc., which was the holding company
for Towne Bank (TB), headquartered in Woodinville, Washington, a Seattle
suburb. As a result of the merger of Towne Bancorp, Inc. into FWWB, TB became
a wholly owned subsidiary of FWWB. TB operates six full service branches in
the Seattle, Washington, metropolitan area--in Woodinville, Kirkland, Redmond,
Bellevue, Renton and Bothell. TB's results of operations for the full year
ended March 31, 1999 are included in the Company's consolidated results of
operations for the year ended March 31, 1999.
Acquisition of Whatcom State Bancorp, Inc.:
On January 1, 1999 FWWB completed the acquisition of Whatcom State Bancorp
Inc. FWWB paid $12.1 million in common stock for all the outstanding common
shares and stock options of Whatcom State Bancorp, Inc., which was the holding
company for Whatcom State Bank (WSB), headquartered in Bellingham, Washington.
WSB operates five full service branches in the Bellingham, Washington,
area--Bellingham, Ferndale, Lynden, Blaine and Point Roberts. WSB's results of
operations for three months ended March 31, 1999 are included in the Company's
consolidated results of operations for the year ended March 31, 1999.
Acquisition of Seaport Citizens Bank:
Subsequent to year end, on April 1, 1999, FWWB and FSBW completed the
acquisition of Seaport Citizens Bank (SCB). FSBW paid $10.1 million in cash
for all the outstanding common shares of SCB, which is headquartered in
Lewiston, Idaho. As a result of the merger of SCB into FSBW, SCB became a
division of FSBW. The acquisition will be accounted for as a purchase in
fiscal 2000 and will result in the recording of approximately $6.2 million of
costs in excess of the fair value of SCB's net assets acquired (goodwill).
Goodwill assets will be amortized over a 14-year period and will result in a
current charge to earnings of approximately $107,200 per quarter, beginning in
the first quarter of fiscal 2000, or $429,000 per year. Founded in 1979, SCB
is a commercial bank which had, before recording of goodwill, approximately
$45 million in total assets, $41 million in deposits, $27 million in loans,
and $4.1 million in shareholders' equity at March 31, 1999. SCB operates two
full service branches in Lewiston, Idaho.
42
<PAGE>
YEAR 2000 COMPLIANCE
The "Year 2000" (Y2K) issue is the result of older computer programs being
written using two digits rather than four to define the applicable year.A
computer program that has date sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000.This could result in a system
failure or miscalculations causing disruption of operations, including, among
other things, a temporary inability to process transactions, send statements,
or engage in similar normal business activities.
Based on an assessment of computer hardware, software and other equipment
operated by FWWB and its subsidiary Banks, FWWB presently believes that all
equipment and programs are Y2K compliant. A program for addressing the Y2K
issue through awareness, assessment, renovation and testing has been developed
and implemented. The testing phase has been completed on all internal
operations and mission critical outside vendors. The results of the testing
disclosed only insignificant items that needed to be resolved, all of which
have since been corrected. The program also provided for awareness and
assessment of customer Y2K issues which is ongoing. The Banks have adopted
business contingency plans for the computer systems and facilities that they
have determined to be most critical. These plans conform to guidance from the
FFIEC on business contingency planning for Year 2000 readiness. Contingency
plans include, among other actions, manual workarounds and identification of
resource requirements and alternative solutions for resuming critical business
processes in the event of a Year 2000-related failure.
The three Bank subsidiaries have budgeted approximately $900,000, including
$550,000 to cover soft and hard costs such as upgrading ATMs, contacting and
monitoring vendors, contacting customers, providing information regarding our
preparations and testing the systems identified as critical and non-critical,
and $350,000 for unidentified contingencies. FWWB and its Bank subsidiaries
have incurred and expensed approximately $304,000 of Y2K-related costs in the
current fiscal year ended March 31, 1999. Costs incurred and expensed in prior
fiscal years were not significant.
FWWB and its subsidiary Banks are continuing to contact and monitor all
significant suppliers to determine the extent to which they are vulnerable to
those third parties' failures to remedy their own Y2K impact issues. Third
party responses have indicated satisfactory progress in addressing any needs
for equipment or software renovation. The Banks are contacting their large
loan and deposit customers to build Y2K awareness and encourage early
development of contingency plans and solutions in an effort to prevent
potential business disruption due to Y2K processing failures. Loan and deposit
customers are being updated regularly about the Banks' preparations and
information is being provided to create a much greater awareness of the issue
with some ideas about how to assess and prepare for their own Y2K
vulnerability.
There can be no guarantee that the systems of other companies on which the
Banks' systems rely will be fully functional, or timely converted, or that a
failure to convert by another company, or a conversion that is incompatible
with the Banks' systems would not have a material adverse effect on the Banks.
However, the Banks have tested for the Y2K preparedness of all internal
functions and external functions provided by third parties whenever possible
and do not expect to experience any significant failures. In addition,
contingency or alternate sources of support have been identified for each
critical function and many non-critical functions. In the event that the
Banks' data processing providers' systems prove not to be Y2K compliant and
FWWB is not able to switch to an alternative provider or an in-house system in
a timely manner, resulting computer malfunctions could interrupt the
operations of the Banks and have a significant adverse effect on FWWB's
financial condition and results of operations.
43
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1999 AND MARCH 31, 1998
Total assets increased $477.8 million, or 41.4%, from $1.154 billion at March
31, 1998, to $1.632 billion at March 31, 1999. The majority of the increase,
$271.0 million, was from the acquisitions of TB and WSB, including $25.6
million of goodwill resulting from the use of purchase accounting. The
remaining growth of $206.8 million was spread among all three subsidiary Banks
and was funded primarily with deposit growth, advances from the FHLB and other
borrowings. This growth represented a continuation of management's plans to
further leverage FWWB's capital and reflects the solid economic conditions in
the markets where FWWB operates.
Loans receivable (gross loans less loans in process, deferred fees and
discounts, and allowance for loan losses) grew $345.8 million, or 45.7%, from
$756.9 million at March 31, 1998, to $1.103 billion at March 31, 1999. The
increase in gross loans of $368.1 million from $822.6 million at March 31,
1998, to $1.191 billion at March 31, 1999, consisted of $157.0 million of
mortgages secured by commercial and multifamily real estate, $84.7 million of
construction and land loans and $142.6 million of non-mortgage loans such as
commercial, agricultural and consumer loans. This was offset by a $16.2
million decrease in residential mortgages resulting from repayments and sales
of residential mortgages which were in excess of originations and acquisitions
of new loans. The acquisitions of TB and WSB provided $202.4 million of gross
loans consisting of $37.1 million of commercial and multifamily mortgages,
$25.4 million of construction and land loans, $24.1 million of residential
mortgages and $115.8 million of commercial and consumer loans. Over half of
the increase in assets, excluding the TB and WSB acquisitions, was funded by a
net increase of $110.8 million, or 37.2%, in FHLB advances from $297.5 million
at March 31, 1998, to $408.3 million on March 31, 1999. Asset growth was also
funded by increased deposits and net income from operations. Deposits grew
$348.3 million, or 57.8%, from $602.5 million at March 31, 1998, to $950.8
million at March 31, 1999. Other borrowings, primarily reverse repurchase
agreements with securities dealers, decreased $13.3 million, from $91.7
million at March 31, 1998, to $78.5 million at March 31, 1999. Bank
acquisitions provided $218.4 million of deposits and $9.0 million of FHLB
advances. Securities available for sale and held to maturity increased $61.6
million, or 20.3%, from $302.6 million at March 31, 1998, to $364.0 million at
March 31, 1999. FHLB stock increased $7.1 million ($1.0 million from
acquisitions), as FSBW was required to purchase more stock as a result of its
increased use of FHLB advances. Real estate held for sale increased $557,000,
primarily as a result of completed foreclosures. Equity increased $33.4
million largely resulting from the issuance of $32.5 million of stock and
options in connection with acquisitions. Net income of $15.4 million for
fiscal 1999 was offset by stock repurchases of $15.5 million and cash dividend
payments of $3.6 million.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1999 AND
MARCH 31, 1998
GENERAL. Net income for fiscal 1999 was $15.4 million, or $1.40 per share
(diluted), compared to net income of $13.1 million, or $1.25 per share
(diluted), recorded in fiscal 1998. Net income for fiscal 1999 increased $2.3
million from the comparable period in fiscal 1998. FWWB's improved operating
results reflect the significant growth of assets and liabilities as well as
improvements in net interest margin and non-interest revenues which were
offset somewhat by increased operating expenses and amortization of goodwill.
Compared to year ago levels, total assets increased 41.4% to $1.632 billion at
March 31, 1999, total loans rose 45.7% to $1.103 billion, deposits grew 57.8%
to $950.8 million and borrowings increased 25.0% to $486.7 million. Net
interest margin improved, despite the adverse effects of a flattening yield
curve and declining market rates and loan pricing spreads, reflecting the
acquisitions of TB and WSB and continuing changes in the asset and liability
mix.
44
<PAGE>
INTEREST INCOME. Interest income for the year ended March 31, 1999, was $112.3
million compared to $85.1 million for the year ended March 31, 1998, an
increase of $27.1 million, or 31.9%. The increase in interest income was a
result of a $310.2 million, or 29.7%, growth in average balances of interest-
earning assets combined with a 13 basis point increase in the average yield on
those assets. The yield on average assets rose to 8.28% in fiscal 1999
compared to 8.15% in fiscal 1998. Average loans receivable for fiscal 1999
increased by $252.3 million, or 34.5%, when compared to fiscal 1998,
reflecting previously discussed acquisitions. Interest income on loans
increased by $24.9 million, or 38.5%, compared to the prior year, reflecting
the impact of the increase in average loan balances and a 26 basis point
increase in the average yield, largely resulting from the addition of higher
yielding loans held by TB and WSB, but also reflecting higher yields on the
expanding balances of commercial and multifamily real estate, construction and
land, and non-mortgage loans at FSBW. Loans yielded 9.12% for fiscal 1999
compared to 8.86% for fiscal 1998. The average balance of mortgage-backed
securities, investment securities, daily interest-bearing deposits and FHLB
stock increased by $57.9 million in fiscal 1999, causing the interest and
dividend income from those investments to increase $2.2 million for fiscal
1999 compared to fiscal 1998 despite a 42 basis point decline in the average
yield on those investments. The average yield on mortgage-backed securities
decreased from 6.61% for the year ended March 31, 1998, to 5.96% in 1999,
reflecting both paydowns in certain higher yielding securities and lower
yields on most adjustable-rate securities as market rates declined. The
average yield on investment securities and short term cash investments
decreased from 6.13% for fiscal 1998 to 6.05% in 1999. Earnings on FHLB stock
increased by $398,000, reflecting an increase of $5.4 million in the average
balance of FHLB stock for the year ended March 31, 1999, offset by a 12 basis
point decrease in the dividend yield on that stock.
INTEREST EXPENSE. Interest expense for the year ended March 31, 1999, was
$60.4 million compared to $46.7 million for the comparable period in 1998, an
increase of $13.8 million, or 29.6%. The increase in interest expense was due
to the $322.6 million growth in average interest-bearing liabilities which was
offset somewhat by the average cost of all interest-bearing liabilities
declining to 4.83% from 5.02%. The increase in average interest-bearing
liabilities in fiscal 1999 was largely due to $218.4 million ($158.5 million
average balance) of deposits acquired in the acquisitions of TB and WSB along
with $9.0 million ($3.7 million average balance) of FHLB borrowings. Deposit
interest expense increased $8.7 million for the year ended March 31, 1999.
Average deposit balances increased from $523.5 million for the year ended
March 31, 1998, to $799.4 million for the year ended March 31, 1999, while, at
the same time, the average rate paid on deposit balances decreased 15 basis
points. The decline in the rate paid on deposits primarily reflects the
acquisition of TB and WSB's $42.1 million of non-interest-bearing deposits as
well as generally lower rates paid on interest-bearing accounts resulting from
declining market rates. Average FHLB advances totaled $363.3 million during
the year ended March 31, 1999, as compared to $214.6 million during the year
ended March 31, 1998, resulting in a $4.6 million increase in related interest
expense. The average rate paid on those advances decreased to 5.90% for fiscal
1999 from 6.07% for fiscal 1998. Other borrowings consist of retail repurchase
agreements with customers and repurchase agreements with investment banking
firms secured by certain investment securities. The average balance for other
borrowings increased $9.8 million from $79.2 million for the year ended March
31, 1998, to $89.0 million for the same period in 1999, and the related
interest expense increased $413,000 from $4.6 million to $5.0 million for the
respective periods.
45
<PAGE>
PROVISION FOR LOAN LOSSES. The provision for loan losses for the year ended
March 31, 1999, increased by $1.2 million to $2.8 million compared to $1.6
million for fiscal 1998. This increase is reflective of the growth in loans
receivable which, excluding loans acquired through business combination,
increased by $165.7 million for the 1999 fiscal year compared to an increase
of $111.0 million in the 1998 period. The increase also is reflective of
changes in the portfolio mix which resulted in the need for a higher level of
loss allowance as well as the impact of a greater amount of non-performing
loans and net charge-offs for the year. Specifically, excluding loans acquired
through acquisitions, changes in the loan mix included increases of $119.8
million in commercial and multifamily real estate loans, $59.3 million in
construction and land loans, and $27.9 million in commercial and agricultural
loans, while one- to four-family loans declined by $40.3 million and consumer
loans declined by $1 million. Income producing real estate loans, construction
and land loans, commercial and agricultural loans are generally riskier than
one- to four- family residential loans resulting in a higher provision for
losses. Adding to the need for the increased provision for loan losses for the
year ended March 31, 1999 was an increase in the amount of non-performing
loans which grew to $7.7 million compared to $1.4 million a year earlier.
Further adding to the increase in the provision for loan losses was an
increase in the level of net charge-offs which increased from $519,000 for the
year ended March 31, 1998, to $1.1 million for the year ended March 31, 1999
(see Notes 7 and 8 to the Consolidated Financial Statements for further
analysis of the loan portfolio mix and allowance for loan losses).
The allowance for losses on loans is maintained at a level sufficient to
provide for estimated losses based on evaluating known and inherent risks in
the loan portfolio and upon management's continuing analysis of the factors
underlying the quality of the loan portfolio. These factors include changes in
the size and composition of the loan portfolio, delinquency rates, actual loan
loss experience, current economic conditions, detailed analysis of individual
loans for which full collectibility may not be assured, and determination of
the existence and realizable value of the collateral and guarantees securing
the loans. Additions to these allowances are charged to earnings. Realized
losses and charge-offs that are related to specific loans are applied as a
reduction of the carrying value of the assets and charged immediately against
the allowance for losses. Recoveries on previously charged off loans are
credited to the allowance. The reserve is based upon factors and trends
identified by management at the time financial statements are prepared. The
Company's methodology for assessing the appropriateness of the allowance
consists of several key elements, which include specific allowances, an
allocated formula allowance, and an unallocated allowance. Losses on specific
loans are provided for when the losses are probable and estimable. The formula
allowance is calculated by applying loss factors to outstanding loans,
excluding loans with specific allowances. Loss factors are based on the
Company's historical loss experience adjusted for significant factors
including the experience of other banking organizations that, in management's
judgment, affect the collectibility of the portfolio as of the evaluation
date. The unallocated allowance is based upon management's evaluation of
various factors that are not directly measured in the determination of the
formula and specific allowances. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review the Banks'
allowance for loan losses. Such agencies may require the Banks to provide
additions to the allowance based upon judgments different from management.
Although management uses the best information available, future adjustments to
the allowance may be necessary due to economic, operating, regulatory and
other conditions beyond the Banks' control. The allowance for loan losses
equaled 1.10% of gross loans and 160% of non-performing loans at March 31,
1999, compared to 1.03% and 533%, respectively, at March 31, 1998.
OTHER OPERATING INCOME. Other operating income increased $2.7 million from
$4.7 million for the year ended March 31, 1998, to $7.5 million for the year
ended March 31, 1999. The increase included a $1.1 million increase in other
fees and service charges due largely to the addition of TB operations. Fee and
service charge income also increased at FSBW and IEB, reflecting deposit
growth, pricing adjustments, and the fourth quarter acquisition of WSB. There
also was a $1.5 million increase in net gains on loans sold in fiscal 1999, as
compared to the same period in 1998. This increase primarily reflects
increased sales of loans by FSBW, with servicing retained, and by IEB which
increased the volume of loans sold in the secondary market over the comparable
period in the prior year. In addition, gains on loans sold for fiscal year
1999 include $250,000 of gains on the sale of SBA guaranteed loans originated
by TB. The volume of loan sales and related net gain on sale of loans
increased from $80.6 million and $1.4 million, respectively, for the year
ended March 31, 1998, to $125.7 million and $2.9 million, respectively, for
the year ended March 31, 1999. Increased sales of loans at FSBW were designed
to curtail the rate of growth in relatively low yielding fixed-rate
residential mortgages during this period of low market rates and to reduce the
Bank's exposure to the risk of rising interest rates. The $96,000 increase in
miscellaneous other income reflects a gain on the sale of IEB real property in
the second quarter of fiscal 1999.
46
<PAGE>
OTHER OPERATING EXPENSES. Other operating expenses increased $10.7 million
from $21.0 million for the year ended March 31, 1998, to $31.7 million for the
year ended March 31, 1999. The increase in expenses was largely due to the
inclusion of $7.2 million of TB's operating expenses in fiscal 1999 that were
not present in fiscal 1998 and the additional expenses of five branches from
WSB's acquisition in the last quarter of fiscal 1999. The increase in other
operating expenses was partially offset by a $620,000 increase in capitalized
loan origination costs resulting from an increased volume in loan
originations. In addition to the acquisitions of TB and WSB, increases in
other operating expenses reflect the overall growth in assets and liabilities,
customer relationships and complexity of operations as FWWB continues to
expand. Despite the higher operating expenses associated with transitioning
FWWB to more of a commercial bank profile, FWWB's efficiency ratio, excluding
the amortization of goodwill, increased only 2.94 percentage points, to 49.50%
(53.53% including goodwill), for fiscal 1999, from 46.56% (48.64% including
goodwill) for the same period in fiscal 1998. Other operating expenses as a
percentage of average assets were 2.21% (2.04% excluding the amortization of
goodwill) for the year ended March 31, 1999, compared to 1.93% (1.85%
excluding the amortization of goodwill) for the year ended March 31, 1998.
INCOME TAXES. Income tax expense was $9.3 million for the year ended March 31,
1999, compared to $7.4 million for the comparable period in 1998. The $1.8
million increase in the provision for income taxes reflects the higher level
of income being taxed at higher effective rates due to the phase out of the
34% surtax exemption; the net effect of IEB paying Oregon state income taxes;
and the fact that the expenses from the amortization of goodwill acquired in
purchasing IEB, TB and WSB and part of the expense recorded in the release of
the Employee Stock Ownership Plan (ESOP) shares are not deductible for tax
purposes. The Company's effective tax rates for the year ended March 31, 1999
and 1998, were 38% and 36%, respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1998 AND
MARCH 31, 1997
GENERAL. Net income for fiscal 1998 was $13.1 million, or $1.25 per share
(diluted), compared to net income of $9.3 million, or $0.87 per share
(diluted), recorded in fiscal 1997. Net income for fiscal 1997 was
significantly affected by the $2.4 million ($1.6 million after tax) SAIF
assessment. In addition, fiscal 1998 included $3.0 million of net income from
a full year of operations at IEB, which the Company acquired on August 1,
1996, compared to $1.5 million for eight months in the comparable fiscal 1997
period.
The Company's improved operating results reflect the significant growth of
assets and liabilities as well as improvements in net interest margin and
non-interest revenues. The substantial increase in the asset and liability
balances during the year since March 31, 1997, resulted from the continued
deployment and leveraging of the $98.6 million in net proceeds raised in the
Company's conversion from mutual to stock ownership on October 31, 1995. This
growth helped to increase the Company's return on average equity from 7.36%
(excluding the SAIF assessment of $1.6 million after tax, 6.30% when the SAIF
assessment is included) for fiscal 1997 to 8.70% for fiscal 1998.
INTEREST INCOME. Interest income for the year ended March 31, 1998, was $85.1
million compared to $67.3 million for the year ended March 31, 1997, an
increase of $17.8 million, or 26.5%. The increase in interest income was a
result of a $183.2 million, or 21.3%, growth in average balances of
interest-earning assets combined with a 34 basis point increase in the average
yield on those assets. The yield on average assets rose to 8.15% in fiscal
1998 compared to 7.81% in fiscal 1997. Average loans receivable for fiscal
1998 increased by $185.3 million, or 34.0%, when compared to fiscal 1997.
Interest income on loans increased by $18.1 million, or 39.0%, compared to the
prior year, reflecting the impact of the increase in average loan balances and
a 32 basis point increase in the average yield largely resulting from the
addition of higher yielding loans held by IEB, but also reflecting higher
yields on the expanding balances of commercial and multifamily real estate,
construction and land, and non-mortgage loans at FSBW. Loans yielded 8.86% for
fiscal 1998 compared to 8.54% for fiscal 1997. The average balance of
mortgage-backed securities, investment securities, daily interest-bearing
deposits and FHLB stock decreased by $2.1 million in fiscal 1998, causing the
interest and dividend income from those investments to decrease a modest
$291,000 for fiscal 1998 compared to fiscal 1997. The average yield on
mortgage-backed securities decreased from 6.86% for the year ended March 31,
1997, to 6.61% in 1998 reflecting both paydowns in certain higher yielding
securities and lower yields on most adjustable-rate securities as market rates
generally declined. FHLB stock dividend income increased by $279,000,
reflecting an increase of $3.4 million in the average balance of FHLB stock
for the year ended March 31, 1998, and a 9 basis point increase in the
dividend yield on that stock.
47
<PAGE>
INTEREST EXPENSE. Interest expense for the year ended March 31, 1998, was
$46.7 million compared to $36.4 million for the comparable period in 1997, an
increase of $10.3 million, or 28.3%. The increase in interest expense was due
to the $191.8 million growth in average interest-bearing liabilities. The
increase in average interest-bearing liabilities in fiscal 1998 was largely
due to a $61.8 million increase in the average balance of FHLB advances and
other borrowings. Average FHLB advances totaled $276.3 million during the year
ended March 31, 1998, as compared to $214.6 million during the year ended
March 31, 1997, resulting in a $4.3 million increase in related interest
expense. The average rate paid on those advances increased to 6.07% for fiscal
1998 from 5.83% for fiscal 1997. Other borrowings consist of retail repurchase
agreements with customers and repurchase agreements with investment banking
firms secured by certain investment securities. The average balance for other
borrowings increased $41.2 million from $38.0 million for the year ended March
31, 1997, to $79.2 million for the same period in 1998, and the related
interest expense increased $2..5 million from $2.1 million to $4.6 million for
the respective periods. The bulk of this growth in other borrowings reflects a
$45.6 million increase in repurchase agreements with investment banking firms
that were used to finance a portion of the Company's assets. The repurchase
agreements with investment banking firms generally carry higher rates than
retail agreements; therefore, as they constituted a greater portion of other
borrowings, the weighted average rate increased. Deposit interest expense
increased $3.6 million for the year ended March 31, 1998. Average deposit
balances increased from $477.4 million for the year ended March 31, 1997, to
$566.2 million for the year ended March 31, 1998, while, at the same time, the
average rate paid on deposit balances decreased 8 basis points. The decline in
the rate paid on deposits primarily reflects the acquisition of IEB's $32.1
million of non- interest-bearing deposits as well as generally lower rates
paid on interest- bearing accounts of IEB, which impacted the full twelve
month period in 1998 in contrast to only eight months in 1997.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the year ended
March 31, 1998, increased by $205,000 to $1.6 million compared to $1.4 million
for fiscal 1997. This increase is reflective of the need to provide a higher
allowance level as a result of the $114.8 million growth in gross loans
receivable for the fiscal year as well as changes in the mix of the loan
portfolio. In particular, growth in commercial and multifamily real estate
loans, which increased by $38.7 million, commercial and agricultural loans,
which increased by $19.8 million, and consumer and credit card loans, which
increased $5.8 million, resulted in an increased level of loss provision.
Somewhat mitigating these changes in the loan mix was a modest decline in the
amount of non-performing loans which declined to $1.4 million at March 31,
1998 compared to $2.1 million at March 31, 1997. The allowance for loan losses
equaled 1.03% to net loans and 553% of non-performing loans at March 31, 1998
compared to 0.94% and 320%, respectively, at March 31, 1997.
OTHER OPERATING INCOME. Other operating income increased from $3.1 million for
the year ended March 31, 1997, to $4.7 million for the year ended March 31,
1998. Part of the increase was due to a $921,000 increase in other fees and
service charges due largely to IEB operations earning higher fees as a
commercial bank combined with increased fee income at FSBW reflecting deposit
growth and pricing adjustments. In addition there was a $693,000 increase in
net gains on securities and loans sold in fiscal 1998 as compared to 1997.
This increase primarily reflects inclusion of a full year of activity from
IEB's residential mortgage banking operations and increased sales of loans,
with servicing retained, by FSBW which increased the volume of loans sold in
the secondary market over the prior year.
OTHER OPERATING EXPENSES. Other operating expenses for the year ended March
31, 1998 increased $1.7 million from the prior period in fiscal 1997. The
decrease in the $2.4 million special SAIF assessment for the year ended March
31, 1998 was more than offset by a $4.3 million increase in other operating
expenses, which among other increases included a full year of IEB's operations
in the fiscal 1998 period compared to eight months in the comparable period in
fiscal 1997. In addition to the full year impact of IEB, increases in other
operating expenses reflected overall growth in assets and liabilities,
customer relationships and complexity of operations as the Company continued
to expand. The Company's efficiency ratio, excluding the amortization of
goodwill and the $2.4 million one-time special SAIF assessment, improved to
46.56% (48.64% including goodwill) for the year ended March 31, 1998, from
48.11% (56.87% including goodwill) for fiscal 1997. Other operating expenses
as a percentage of average assets declined to 1.93% (1.85% excluding the
amortization of goodwill) for the year ended March 31, 1998, compared to 2.17%
(1.90% excluding the SAIF assessment) (1.83% excluding the amortization of
goodwill) for the year ended March 31, 1997.
48
<PAGE>
INCOME TAXES. Income tax expense was $7.4 million for the year ended March 31,
1998, compared to $3.9 million for fiscal 1997. The $3.5 million increase in
the provision for income taxes reflects the higher level of income being taxed
at higher effective rates due to the phase out of the 34% surtax exemption;
the net effect of IEB's state taxes and non-deductible goodwill expense and
the fact that part of the expense recorded in the release of the ESOP shares
was not deductible for tax purposes. The Company's effective tax rates for the
years ended March 31, 1998 and 1997, were 36% and 30%, respectively.
YIELDS EARNED AND RATES PAID
The earnings of the Company depend largely on the spread between the yield on
interest-earning assets (primarily loans and investment securities) and the
cost of interest-bearing liabilities (primarily deposit accounts and FHLB
advances), as well as the relative size of the Company's interest-earning
assets and interest-bearing liability portfolio.
Table I, Analysis of Net Interest Spread, sets forth, for the periods
indicated, information regarding average balances of assets and liabilities as
well as the total dollar amounts of interest income from average interest-
earning assets and interest expense on average interest-bearing liabilities,
resultant yields, interest rate spread, net interest margin, and ratio of
average interest-earning assets to average interest-bearing liabilities.
Average balances for a period have been calculated using the daily average
during such period.
Changes in the economic and interest rate environment, competition in the
marketplace and changes in asset and liability mix can cause the Company's
average interest rate spread to increase or decrease. While strong competition
and a generally unfavorable interest rate environment (a relatively flat yield
curve brought about largely by declining intermediate and long term interest
rates) have had negative effects on the Company's interest rate spread in
recent periods, for the past two years the most significant impact on the
Company's interest rate spread has come from changes in its asset and
liability mix. On balance, those changes in mix have resulted in an expanding
interest rate spread which has increased from 2.88% in 1997 to 3.13% in 1998
and again to 3.45% in 1999. Contributing to this increased spread has been a
decline in the relative portion of the Company's assets invested in securities
which was 36.8% of average earning assets in 1997, 30.1% in 1998, and 27.5% in
1999. In addition to the relative decline in investment securities and
commensurate increase in loans, the mix of the loan portfolio has changed to
include more higher yielding loans. Changes in the portfolio mix are evident
in the higher yields on mortgage loans which increased from 8.38% in 1997 to
8.69% in 1998 and to 8.95% in 1999. Changes in the portfolio mix are also
reflected in the increased portion of non-mortgage loans which increased from
5.4% of earning assets in 1997 to 8.1% of earning assets in 1998 and to 14.6%
in 1999. Also contributing to an improved interest rate spread has been a
decline in the cost of deposits primarily brought about by the substantial
increase in the amount of checking and NOW account balances. Deposit costs
declined from 4.49% in 1997 to 4.41% in 1998 and to 4.26% in 1999.
Substantially offsetting the decline in deposit costs has been an increase in
the use of more expensive FHLB advances and other borrowings. As a result, the
cost of total interest-bearing liabilities increased from 4.93% in 1997 to
5.02% in 1998, and then declined to 4.83% in 1999. The acquisition of IEB, TB
and WSB significantly contributed to the changes in loan and deposit portfolio
mix. Improvement in the Company's net interest margin over this same period
mostly reflects the same changes associated with the increased net interest
rate spread. However, counterbalancing to a degree this increased spread is
the somewhat adverse impact on net interest margin resulting from the
increased use of leverage which can be seen in the declining ratio of average
interest-earning assets to average interest-bearing liabilities. Nonetheless,
net interest margin increased from 3.59% in 1997 to 3.68% in 1998 and to 3.83%
in 1999. Management believes that in the future increased net interest income
will come primarily from increased volumes, although continued changes in
asset and liability mix and a slightly more favorable interest rate
environment may also add to net interest income.
49
<PAGE>
<TABLE>
TABLE I: ANALYSIS OF NET INTEREST SPREAD
Years Ended March 31 (dollars in thousands)
1999 1998 (1) 1997(1)
-------------------------- -------------------------- --------------------------
Average Interest & Yield/ Average Interest & Yield/ Average Interest & Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
------- ---------- ---- ------- ---------- ---- ------- ---------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets:
Mortgage loans $ 784,534 $ 70,193 8.95% $ 645,576 $ 56,111 8.69% $ 498,578 $ 41,797 8.38%
Commercial/agricul-
tural loans 153,706 15,047 9.79 57,516 5,587 9.71 30,120 2,829 9.39
Consumer and other
loans 44,568 4,375 9.82 27,412 2,997 10.93 16,494 1,923 11.66
---------- -------- ---- ---------- -------- ---- -------- -------- ----
Total loans (2) 982,808 89,615 9.12 730,505 64,695 8.86 545,192 46,549 8.54
Mortgage-backed
securities 218,648 13,025 5.96 189,572 12,522 6.61 181,148 12,420 6.86
Securities and
deposits 134,014 8,107 6.05 110,625 6,783 6.13 124,592 7,455 5.98
FHLB stock 20,066 1,545 7.70 14,661 1,147 7.82 11,222 868 7.73
---------- -------- ---- ---------- -------- ---- -------- -------- ----
Total investment
securities 372,728 22,671 6.08 314,858 20,452 6.50 316,962 20,743 6.54
---------- -------- ---- ---------- -------- ---- -------- -------- ----
Total interest-
earning assets 1,355,536 112,292 8.28 1,045,362 85,147 8.15 862,154 67,292 7.81
-------- ---- -------- ---- -------- ----
Non-interest-earning
assets 80,038 43,256 30,217
---------- ---------- --------
Total assets $1,435,574 $1,088,618 $892,371
========== ========== ========
Interest-bearing
liabilities:
Savings accounts $ 47,487 1,356 2.86 $ 42,937 1,248 2.91 $ 41,114 1,183 2.88
Checking and NOW
accounts(3) 154,108 1,110 0.72 103,426 899 0.87 76,691 864 1.13
Money market accounts 109,379 4,154 3.80 76,048 3,073 4.04 61,426 2,077 3.38
Certificates of
deposit 488,377 27,399 5.61 351,042 20,069 5.72 305,336 17,612 5.77
---------- -------- ---- ---------- -------- ---- -------- -------- ----
Total deposits 799,351 34,019 4.26 573,453 25,289 4.41 484,567 21,736 4.49
Other interest-bearing
liabilities:
FHLB advances 363,279 21,430 5.90 276,328 16,782 6.07 214,563 12,504 5.83
Other borrowings 88,967 4,993 5.61 79,210 4,580 5.78 37,952 2,132 5.61
---------- -------- ---- ---------- -------- ---- -------- -------- ----
Total interest-
bearing
liabilities 1,251,597 60,442 4.83 928,991 46,651 5.02 737,082 36,372 4.93
-------- ---- -------- ---- -------- ----
Non-interest-bearing
liabilities 10,682 8,783 7,360
---------- ---------- --------
Total liabilities 1,262,279 937,774 744,442
---------- ---------- --------
Equity 173,295 150,844 147,929
---------- ---------- --------
Total liabilities
and equity $1,435,574 $1,088,618 $892,371
========== ========== ========
Net interest income $ 51,850 $ 38,496 $ 30,920
======== ======== ========
3.45% 3.13% 2.88%
===== ===== =====
Net interest margin 3.83% 3.68% 3.59%
===== ===== =====
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 108.30% 112.53% 116.97%
======= ======= =======
- ----------
(1) Restated to be comparable to current year's presentation.
(2) Average balances include loans accounted for on a nonaccrual basis and loans 90 days or more past
due. Amortized net deferred loan fees are included with interest and dividends on loans.
(3) Average balances include non-interest-bearing deposits.
50
</TABLE>
<PAGE>
<TABLE>
Table II, Rate/Volume Analysis, sets forth the effects of changing rates and volumes on net interest income
of the Company. Information is provided with respect to (i) effects on interest income attributable to
changes in volume (changes in volume multiplied by prior rate); (ii) effects on interest income attributable
to changes in rate (changes in rate multiplied by prior volume); and (iii) effects on interest income
attributable to changes in rate and volume (changes in rate multiplied by changes in volume).
TABLE II: RATE/VOLUME ANALYSIS
Year Ended March 31, 1999 Year Ended March 31, 1998
Compared to March 31, 1998 Compared to March 31, 1997
Increase (Decrease) Due to Increase (Decrease) Due to (1)
------------------------------ -------------------------------
(dollars in thousands)
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
---- ------ ------ --- ---- ------ ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $1,646 $12,075 $ 361 $14,082 $1,540 $12,318 $ 456 $14,314
Commercial/agricultural loans 43 9,340 77 9,460 98 2,572 88 2,758
Consumer and other loans (307) 1,875 (190) 1,378 (119) 1,273 (80) 1,074
------ ------ ------- ------ ------- ------- ------ -------
Total loans(2) 1,382 23,290 248 24,920 1,519 16,163 464 18,146
Mortgage-backed securities (1,230) 1,922 (189) 503 (455) 578 (21) 102
Securities and deposits (91) 1,434 (19) 1,324 184 (835) (21) (672)
FHLB stock (19) 423 (6) 398 10 266 3 279
------ ------ ------- ------ ------- ------- ------ -------
Total net change in interest
income on interest-earning
assets 42 27,069 34 27,145 1,258 16,172 425 17,855
------ ------ ------- ------ ------- ------- ------ -------
Interest-bearing liabilities:
Deposits (893) 9,962 (339) 8,730 (367) 3,991 (71) 3,553
FHLB advances (482) 5,278 (148) 4,648 529 3,601 148 4,278
Other borrowings (156) 586 (17) 413 63 2,319 66 2,448
------ ------ ------- ------ ------- ------- ------ -------
Total net change in interest
expense on interest-bearing
liabilities (1,531) 15,826 (504) 13,791 225 9,911 143 10,279
------ ------ ------- ------ ------- ------- ------ -------
Net change in net interest income $1,573 $11,243 $ 538 $13,354 $1,033 $ 6,261 $ 282 $ 7,576
====== ======= ======= ======= ======= ======= ====== =======
- -------
(1) Restated to be comparable to current year's presentation.
(2) Does not include interest on loans 90 days or more past due.
51
</TABLE>
<PAGE>
MARKET RISK AND ASSET/LIABILITY MANAGEMENT
The financial condition and operations of the Company are influenced
significantly by general economic conditions, including the absolute level of
interest rates as well as changes in interest rates and the slope of the yield
curve. The Company's profitability is dependent to a large extent on its net
interest income, which is the difference between the interest received from
its interest-earning assets and the interest expense incurred on its
interest-bearing liabilities.
The activities of the Company, like all financial institutions, inherently
involve the assumption of interest rate risk. Interest rate risk is the risk
that changes in market interest rates will have an adverse impact on the
institution's earnings and underlying economic value. Interest rate risk is
determined by the maturity and repricing characteristics of an institution's
assets, liabilities, and off-balance-sheet contracts. Interest rate risk is
measured by the variability of financial performance and economic value
resulting from changes in interest rates. Interest rate risk is the primary
market risk impacting the Company's financial performance.
The greatest source of interest rate risk to the Company results from the
mismatch of maturities or repricing intervals for rate sensitive assets,
liabilities and off-balance-sheet contracts. This mismatch or gap is generally
characterized by a substantially shorter maturity structure for
interest-bearing liabilities than interest-earning assets. Additional interest
rate risk results from mismatched repricing indices and formulae (basis risk
and yield curve risk), and product caps and floors and early repayment or
withdrawal provisions (option risk), which may be contractual or market
driven, that are generally more favorable to customers than to the Company.
The principal objectives of asset/liability management are to evaluate the
interest rate risk exposure of the Company; to determine the level of risk
appropriate given the Company's operating environment, business plan
strategies, performance objectives, capital and liquidity constraints, and
asset and liability allocation alternatives; and to manage the Company's
interest rate risk consistent with regulatory guidelines and approved policies
of the Board of Directors. Through such management the Company seeks to reduce
the vulnerability of its earnings and capital position to changes in the level
of interest rates. The Company's actions in this regard are taken under the
guidance of the Asset/Liability Management Committee, which is comprised of
members of the Company's senior management. The committee closely monitors the
Company's interest sensitivity exposure, asset and liability allocation
decisions, liquidity and capital positions, and local and national economic
conditions and attempts to structure the loan and investment portfolios and
funding sources of the Company to maximize earnings within acceptable risk
tolerances.
SENSITIVITY ANALYSIS
The Company's primary monitoring tool for assessing interest rate risk is
asset/liability simulation modeling which is designed to capture the dynamics
of balance sheet, interest rate and spread movements and to quantify
variations in net interest income resulting from those movements under
different rate environments. The sensitivity of net interest income to changes
in the modeled interest rate environments provides a measurement of interest
rate risk. The Company also utilizes market value analysis, which addresses
changes in estimated net market value of equity arising from changes in the
level of interest rates. The net market value of equity is estimated by
separately valuing the Company's assets and liabilities under varying interest
rate environments. The extent to which assets gain or lose value in relation
to the gains or losses of liability values under the various interest rate
assumptions determines the sensitivity of net equity value to changes in
interest rates and provides an additional measure of interest rate risk.
The interest rate sensitivity analysis performed by the Company incorporates
beginning-of-the-period rate, balance and maturity data, using various levels
of aggregation of that data, as well as certain assumptions concerning the
maturity, repricing, amortization and prepayment characteristics of loans and
other interest-earning assets and the repricing and withdrawal of deposits and
other interest-bearing liabilities into an asset/liability computer simulation
model. The Company updates and prepares simulation modeling at least quarterly
for review by senior management and the directors. The Company believes the
data and assumptions are realistic representations of its portfolio and
possible outcomes under the various interest rate scenarios. Nonetheless, the
interest rate sensitivity of the Company's net interest income and net market
value of equity could vary substantially if different assumptions were used or
if actual experience differs from the assumptions used. Tables III and III
(a), Interest Rate Risk Indicators, set forth as of March 31, 1999 and 1998,
the estimated changes in the
52
<PAGE>
Company's net interest income over a one-year time horizon and the estimated
changes in market value of equity based on the indicated interest rate
environments.
TABLE III: INTEREST RATE RISK INDICATORS
As of March 31, 1999
Estimated Change in
-----------------------------------------
Change (In Basis Points) Net Interest Income
In Interest Rates (1) Next 12 Months Net Market Value
------------------------ ------------------- --------------------
(Dollars in thousands)
+400 $ (1,677) (3.0%) $ (72,990) (37.4%)
+300 (649) (1.2%) (55,433) (28.4%)
+200 (81) (0.1%) (34,919) (17.9%)
+100 194 0.3% (14,526) (7.4%)
0 0 0 0 0
-100 (1,440) (2.6%) 83 0.0%
-200 (3,582) (6.4%) (7,140) (3.7%)
-300 (6,568) (11.6%) (20,441) (10.5%)
-400 (9,495) (16.8%) (31,427) (16.1%)
TABLE III (A): INTEREST RATE RISK INDICATORS
As of March 31, 1998
Estimated Change in
-----------------------------------------
Change (In Basis Points) Net Interest Income
In Interest Rates (1) Next 12 Months Net Market Value
------------------------ ------------------- --------------------
(Dollars in thousands)
+400 $ (570) (1.5%) $ (51,291) (32.2%)
+300 355 0.9% (38,352) (24.1%)
+200 902 2.4% (22,884) (14.4%)
+100 728 1.9% (8,715) (5.5%)
0 0 0 0 0
-100 (1,129) (3.0%) (311) (0.2%)
-200 (2,748) (7.3%) (2,791) (1.8%)
-300 (4,747) (12.5%) (9,102) (5.7%)
-400 (7,057) (18.6%) (17,535) (11.0%)
- ---------
(1) Assumes an instantaneous and sustained uniform change in market interest
rates at all maturities.
53
<PAGE>
Another although less reliable monitoring tool for assessing interest rate
risk is "gap analysis." The matching of the repricing characteristics of
assets and liabilities may be analyzed by examining the extent to which such
assets and liabilities are "interest sensitive" and by monitoring an
institution's interest sensitivity "gap." An asset or liability is said to be
interest sensitive within a specific time period if it will mature or reprice
within that time period. The interest rate sensitivity gap is defined as the
difference between the amount of interest-earning assets anticipated, based
upon certain assumptions, to mature or reprice within a specific time period
and the amount of interest-bearing liabilities anticipated to mature or
reprice, based upon certain assumptions, within that same time period. A gap
is considered positive when the amount of interest- sensitive assets exceeds
the amount of interest-sensitive liabilities. A gap is considered negative
when the amount of interest sensitive liabilities exceeds the amount of
interest-sensitive assets. Generally, during a period of rising rates, a
negative gap would tend to adversely affect net interest income while a
positive gap would tend to result in an increase in net interest income.
During a period of falling interest rates, a negative gap would tend to result
in an increase in net interest income while a positive gap would tend to
adversely affect net interest income.
Certain shortcomings are inherent in gap analysis. For example, although
certain assets and liabilities may have similar maturities or periods of
repricing, they may react in different degrees to changes in market rates.
Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market rates, while interest rates on other
types may lag behind changes in market rates. Additionally, certain assets,
such as ARM loans, have features that restrict changes in interest rates on a
short-term basis and over the life of the asset. Further, in the event of a
change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in calculating the table. Finally,
the ability of some borrowers to service their debt may decrease in the event
of a severe interest rate increase.
Tables IV and IV (a), Interest Sensitivity Gap, present the Company's interest
sensitivity gap between interest-earning assets and interest-bearing
liabilities at March 31, 1999 and 1998. The tables set forth the amounts of
interest-earning assets interest-bearing liabilities which are anticipated by
the Company, based upon certain assumptions, to reprice or mature in each of
the future periods shown. At March 31, 1999, total interest-earning assets
maturing or repricing within one year exceeded total interest-bearing
liabilities maturing or repricing in the same time period by $9.1 million,
representing a one-year gap to total assets ratio of 0.56%.
Management is aware of the sources of interest rate risk and in its opinion
actively monitors and manages it to the extent possible. The interest rate
risk indicators and interest sensitivity gaps for the Company as of March 31,
1999 and 1998 are within policy guidelines. Management considers that the
Company's current level of interest rate risk is reasonable.
54
<PAGE>
<TABLE>
TABLE IV: INTEREST SENSITIVITY GAP
as of March 31, 1999
Within 6 Months 1-3 3-5 5-10 Over 10
6 Months To One Year Years Years Years Years Total
-------- ----------- ----- ----- ----- ----- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets(1):
Construction loans $ 98,302 $ 33,841 $ 813 $ 588 $ -- $ -- $ 133,544
Fixed-rate mortgage loans 45,106 41,823 144,842 113,687 130,154 61,775 537,387
Adjustable-rate mortgage loans 103,894 50,506 27,494 25,518 -- -- 207,412
Fixed-rate mortgage-backed
securities 13,554 14,674 62,831 24,087 10,968 1,182 127,296
Adjustable-rate mortgage-backed
securities 108,001 6,880 -- -- -- - 114,881
Fixed-rate commercial/agricultural
loans 9,431 7,484 12,599 15,482 11,528 701 57,225
Adjustable-rate commercial/
agricultural loans 139,292 -- -- -- -- -- 139,292
Consumer and other loans 12,400 3,485 10,330 6,140 1,468 10,235 44,058
Investment securities and
interest-bearing deposits 60,360 8,250 23,062 26,410 15,295 30,166 163,543
-------- -------- -------- -------- -------- ------- ----------
Total rate sensitive assets 590,340 166,943 281,971 211,912 169,413 104,059 1,524,638
-------- -------- -------- -------- -------- ------- ----------
Interest-bearing liabilities(2):
Regular savings and NOW accounts 22,620 22,620 52,780 52,780 -- -- 150,800
Money market deposit accounts 66,039 39,623 26,415 -- -- -- 132,077
Certificates of deposit 272,316 134,609 130,451 33,105 9,527 21 580,029
FHLB advances 105,000 34,414 109,499 102,990 55,500 849 408,252
Other borrowings 47,690 -- 25,000 -- -- -- 72,690
Retail repurchase agreements 2,993 237 1,455 1,092 -- -- 5,777
-------- -------- -------- -------- -------- ------- ----------
Total rate sensitive
liabilities 516,658 231,503 345,600 189,967 65,027 870 1,349,625
-------- -------- -------- -------- -------- ------- ----------
Excess (deficiency) of interest-
sensitive assets over interest-
sensitive liabilities $ 73,683 $(64,560) $(63,629) $ 21,945 $104,386 $103,189 $ 175,013
========= ========= ========= ======== ======== ======== ==========
Cumulative excess (deficiency) of
interest-sensitive assets $ 73,683 $ 9,122 $(54,507) $(32,562) $ 71,824 $175,013 $ 175,013
========= ========= ========= ========= ======== ======== ==========
Cumulative ratio of interest-
earning assets to interest-
bearing liabilities 114.26% 101.22% 95.02% 97.46% 105.33% 112.97% 112.97%
========= ========= ========= ========= ======== ======== ==========
Interest sensitivity gap to
total assets 4.52% (3.96%) (3.90%) 1.34% 6.40% 6.32% 10.72%
========= ========= ========= ========= ======== ======== ==========
Ratio of cumulative gap to
total assets 4.52% 0.56% (3.34%) (2.00%) 4.40% 10.72% 10.72%
========= ========= ========= ========= ======== ======== ==========
(footnotes follow tables)
55
</TABLE>
<PAGE>
<TABLE>
TABLE IV (A): INTEREST SENSITIVITY GAP
as of March 31, 1998
Within 6 Months 1-3 3-5 5-10 Over 10
6 Months To One Year Years Years Years Years Total
-------- ----------- ----- ----- ----- ----- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets(1):
Construction loans $ 40,697 $ 29,262 $ -- $ -- $ -- $ -- $ 69,959
Fixed-rate mortgage loans 38,603 32,601 105,036 80,656 94,440 61,203 412,539
Adjustable-rate mortgage loans 108,398 56,386 12,791 10,072 -- -- 187,647
Fixed-rate mortgage-backed
securities 4,364 4,331 15,540 7,197 4,860 829 37,121
Adjustable-rate mortgage-backed
securities 153,107 4,832 1,062 -- -- -- 159,001
Fixed-rate commercial/agricultural
loans 4,497 3,539 7,981 4,319 1,668 277 22,281
Adjustable-rate commercial/
agricultural loans 45,198 -- -- -- -- -- 45,198
Consumer and other loans 16,190 2,610 7,086 3,918 1,039 -- 30,843
Investment securities and
interest-bearing deposits 61,749 9,895 18,770 6,385 13,370 24,460 134,629
--------- --------- --------- -------- -------- -------- ---------
Total rate sensitive assets 472,803 143,456 168,266 112,547 115,377 86,769 1,099,218
--------- --------- --------- -------- -------- -------- ---------
Interest-bearing liabilities(2):
Regular savings and NOW accounts 14,672 14,673 34,236 34,236 -- -- 97,817
Money market deposit accounts 38,204 22,922 15,281 -- -- -- 76,407
Certificates of deposit 154,260 92,171 81,725 29,691 13,760 -- 371,607
FHLB advances 108,946 23,250 103,163 61,190 1,000 -- 297,549
Other borrowings 60,451 -- 25,000 -- -- -- 85,451
Retail repurchase agreements 3,403 810 739 1,318 -- -- 6,270
--------- --------- --------- -------- -------- -------- ---------
Total rate sensitive liabilities 379,936 153,826 260,144 126,435 14,760 -- 935,101
--------- --------- --------- -------- -------- -------- ---------
Excess (deficiency) of interest-
sensitive assets over interest-
sensitive liabilities $ 92,867 $(10,370) $ (91,878)$(13,888) $100,617 $ 86,769 $ 164,117
========= ========= ========= ======== ======== ======== =========
Cumulative excess (deficiency) of
interest-sensitive assets $ 92,867 $ 82,497 $ (9,381)$(23,269) $ 77,348 $164,117 $ 164,117
========= ========= ========= ======== ======== ======== =========
Cumulative ratio of interest-
earning assets to interest-
bearing liabilities 124.44% 115.46% 98.82% 97.47% 108.27% 117.55% 117.55%
========= ========= ========= ======== ======== ======== =========
Interest sensitivity gap to
total assets 8.05% (0.90%) (7.96%) (1.20%) 8.72% 7.52% 14.22%
========= ========= ========= ======== ======== ======== =========
Ratio of cumulative gap to
total assets 8.05% 7.15% (0.81%) (2.02%) 6.70% 14.22% 14.22%
========= ========= ========= ======== ======== ======== ==========
(footnotes follow tables)
56
</TABLE>
<PAGE>
FOOTNOTES FOR TABLES IV AND IV (A): INTEREST SENSITIVITY GAP
- -------------------------------------------------------------
(1) Adjustable-rate assets are included in the period in which interest rates
are next scheduled to adjust rather than in the period in which they are due
to mature, and fixed-rate assets are included in the period in which they are
scheduled to be repaid based upon scheduled amortization, in each case
adjusted to take into account estimated prepayments. Mortgage loans and other
loans are not reduced for allowances for loan losses and non-performing loans.
Mortgage loans, mortgage-backed securities, other loans, and investment
securities are not adjusted for deferred fees and unamortized acquisition
premiums and discounts.
(2) Adjustable-rate liabilities are included in the period in which interest
rates are next scheduled to adjust rather than in the period they are due to
mature. Although the Banks' regular savings, demand, NOW, and money market
deposit accounts are subject to immediate withdrawal, management considers a
substantial amount of such accounts to be core deposits having significantly
longer maturities. For the purpose of the gap analysis, these accounts have
been assigned decay rates to reflect their longer effective maturities. If all
of these accounts had been assumed to be short-term, the one-year cumulative
gap of interest-sensitive assets would have been $(122.9) million, or (7.53%)
of total assets at March 31, 1999 and $(1.3) million, or (0.11%) at March 31,
1998. Interest-bearing liabilities for this table exclude certain non-interest
bearing deposits which are included in the average balance calculations in the
earlier Table I, Analysis of Net Interest Spread.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, borrowings, proceeds from
loan principal and interest payments and sales of loans, and the maturity of
and interest income on mortgage-backed and investment securities. While
maturities and scheduled amortization of loans and mortgage-backed securities
are a predictable source of funds, deposit flows and mortgage prepayments are
greatly influenced by market interest rates, economic conditions and
competition.
The primary investing activity of the Company, through its subsidiaries, is
the origination and purchase of loans. During the years ended March 31, 1999,
1998 and 1997, the Company closed or purchased loans in the amounts of $938.5
million, $562.4 million and $387.8 million, respectively. This activity was
funded primarily by principal repayments on loans and securities, sales of
loans, increases in FHLB advances, other borrowings, and deposit growth. For
the years ended March 31, 1999, 1998 and 1997, principal repayments on loans
totaled $521.0 million, $375.9 million and $207.5 million, respectively.
During the three years ended March 31, 1999, 1998 and 1997, the Company sold
$127.5 million, $82.0 million and $36.9 million, respectively, of loans. FHLB
advances increased $101.7 million, $66.0 million and $52.1 million,
respectively, for the same three years. During the three years ended March 31,
1999, other borrowings decreased $13.3 million for 1999, and increased $29.5
million and $41.9 million for 1998 and 1997. Net deposit growth was $130.0
million (excluding $218.4 million of deposits acquired with TB and WSB), $46.6
million, and $36.3 million (excluding $134.6 million of deposits acquired with
IEB) for the years ended March 31, 1999, 1998 and 1997, respectively.
The Banks must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to accommodate deposit withdrawals, to
support loan growth, to satisfy financial commitments and to take advantage of
investment opportunities. During fiscal years 1999, 1998 and 1997, the Banks
used their sources of funds primarily to fund loan commitments, to purchase
securities, and to pay maturing savings certificates and deposit withdrawals.
At March 31, 1999, the Banks had outstanding loan commitments totaling $147.1
million and undisbursed loans in process totaling $71.6 million. The Banks
generally maintain sufficient cash and readily marketable securities to meet
short term liquidity needs. FSBW maintains a credit facility with the
FHLB-Seattle, which provides for advances which in aggregate may equal up to
45% of FSBW's assets, which as of March 31, 1999, could give a total credit
line of $537.1 million. Advances under this credit facility totaled $402.7
million, or 33.7% of FSBW's assets at March 31, 1999. IEB and TB also maintain
credit lines with various institutions that would allow them to borrow up to
$20.8 million.
At March 31, 1999, savings certificates amounted to $580.0 million, or 61%, of
the Banks' total deposits, including $405.3 million which were scheduled to
mature by March 31, 2000. Historically, the Banks have been able to retain a
significant amount of their deposits as they mature. Management believes it
has adequate resources to fund all loan commitments from savings deposits and
FHLB-Seattle advances and sale of mortgage loans and that it can adjust the
offering rates of savings certificates to retain deposits in changing interest
rate environments.
57
<PAGE>
CAPITAL REQUIREMENTS
The Company is a bank holding company registered with the Federal Reserve.
Bank holding companies are subject to capital adequacy requirements of the
Federal Reserve under the Bank Holding Company Act of 1956, as amended (BHCA),
and the regulations of the Federal Reserve. Each of the Banks, as
state-chartered federally insured institutions, is subject to the capital
requirements established by the FDIC.
The capital adequacy requirements are quantitative measures established by
regulation that require the Company and its subsidiary Banks to maintain
minimum amounts and ratios of capital. The Federal Reserve requires the
Company to maintain capital adequacy that generally parallels the FDIC
requirements. The FDIC requires the Banks to maintain minimum ratios of Tier 1
total capital to risk-weighted assets as well as Tier 1 leverage capital to
average assets (see further discussion in Note 17 to the Consolidated
Financial Statements).
At March 31, 1999 the Company and its banking subsidiaries, FSBW, IEB and TB,
exceeded all current regulatory capital requirements and the Banks were
categorized at the highest regulatory standard, "well-capitalized."
Table V, Regulatory Capital Ratios, shows the regulatory capital ratios of the
Company, FSBW, IEB and TB and minimum regulatory requirements for the Banks to
be categorized as "well-capitalized."
TABLE V: REGULATORY CAPITAL RATIOS
The "Well-capitalized"
Capital Ratios Company FSBW IEB TB Minimum Ratio
- -------------- ------- ---- --- -- -------------
Total capital to risk-
weighted assets 15.15% 17.01% 12.69% 10.03% 10.00%
Tier 1 capital to risk-
weighted assets 13.99 15.80 11.65 8.90 6.00
Tier 1 leverage capital
to average assets 9.44 9.41 9.60 8.87 5.00
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering the changes in
relative purchasing power of money over time due to inflation. The primary
impact of inflation on operations of the Company is reflected in increased
operating costs. Unlike most industrial companies, virtually all the assets
and liabilities of a financial institution are monetary in nature. As a
result, interest rates generally have a more significant impact on a financial
institution's performance than do general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
RECENT ACCOUNTING STANDARDS NOT YET ADOPTED
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
was issued in June 1998 and establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. FWWB will implement this
statement on January 1, 2000. The impact of the adoption of the provisions of
this statement on the results of operations or financial condition of FWWB has
not yet been determined.
SFAS No. 134, Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise, was issued in October 1998. Prior to issuance of SFAS No. 134,
when a mortgage banking company securitized mortgage loans held for sale but
did not sell the security in the secondary market, the security was classified
as trading. SFAS No. 134 requires that the security be classified either
trading, available for sale or held to maturity according to the Company's
intent, unless the Company has already committed to sell the security before
or during the securitization process. The statement is effective for all
fiscal years beginning after December 15, 1998. This statement is not expected
to have a material impact on the results of operations or financial condition
of the Company.
58
<PAGE>
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See pages 52-57 of MD&A
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For financial statements, see index on page 61.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the section captioned "Proposal I - Election
of Directors" in the Registrant's Proxy Statement is incorporated herein by
reference.
Information regarding the executive officers of the Registrant is provided
herein in Part I, Item 1 hereof.
Reference is made to the cover page of this Annual Report and the section
captioned "Compliance with Section 16(a) of the Exchange Act" of the Proxy
Statement for the Annual Meeting of the Stockholders regarding compliance with
Section 16(a) of the Securities Exchange Act of 1934.
ITEM 11- EXECUTIVE COMPENSATION
Information regarding management compensation and transactions with management
and others is incorporated by reference to the section captioned "Proposal I -
Election of Directors" in the Proxy Statement for the Annual Meeting of
Stockholders.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
{a} Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to the
section captioned "Securities Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement for the Annual Meeting of Stockholders.
{b} Security Ownership of Management
Information required by this item is incorporated herein by reference to the
section captioned "Securities Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement for the Annual Meeting of Stockholders.
{c} Changes in Control
The Company is not aware of any arrangements, including any pledge by any
person of securities of the Company, the operation of which may at a
subsequent date result in a change in control of the Company.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the sections captioned "Transactions with
Management" in the Proxy Statement for the Annual Meeting of Stockholders is
incorporated herein by reference.
59
<PAGE>
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
{a} {1} Financial Statements
See Index to Consolidated Financial Statements on page 62.
{2} Financial Statement Schedules
All financial statement schedules are omitted because that are not
applicable or not required, or because the required information is
included in the consolidated financial statements or the notes
thereto or in Part 1, Item 1.
{b} Reports on 8-K:
Reports on Form 8-K filed during the quarter ended March 31, 1999 are
as follows:
Date Filed Purpose
----------- -------
January 1, 1999 Announcement of consummation of previously
announced acquisition of Whatcom State
Bancorp and its wholly-owned subsidiary,
Whatcom State Bank
January 7, 1999 Announcement of entering into an Agreement
and Plan of Merger with Seaport Citizens'
Bank
{c} Exhibits
See Index of Exhibits on page 107.
60
<PAGE>
SIGNATURES OF REGISTRANT
Pursuant to the requirements of the Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on June 26, 1999.
FIRST WASHINGTON BANCORP, INC.
/s/ GARY SIRMON
-------------------------------------
Gary Sirmon
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Company and in the capacities indicated on June 26, 1999.
/S/Gary Sirmon /s/D. Allan Roth
- -------------------------------------- -------------------------------------
Gary Sirmon D. Allan Roth
President and Chief Executive Officer; Executive Vice President and Chief
Director Financial Officer
(Principle Executive Officer) (Principle Financial and Accounting
Officer)
/s/Wilber Pribilsky /s/Robert D. Adams
- -------------------------------------- -------------------------------------
Wilber Pribilsky Robert D. Adams
Director Chairman of the Board
/s/David Casper /s/Morris Ganguet
- -------------------------------------- -------------------------------------
David Casper Morris Ganguet
Director Director
/s/R. R. "Pete" Reid /s/Marvin Sundquist
- -------------------------------------- -------------------------------------
R. R. "Pete" Reid Marvin Sundquist
Director Director
/s/Dean W. Mitchell /s/Jesse G. Foster
- -------------------------------------- -------------------------------------
Dean W. Mitchell Jesse G. Foster
Director Director
/s/S. Rick Meikle /s/Brent A. Orrico
- -------------------------------------- -------------------------------------
S. Rick Meikle Brent A. Orrico
Director Director
61
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
(ITEM 8 AND ITEM 14 (A) (1))
Report of Management.....................................................63
Report of Audit Committee................................................63
Independent Auditors' Report.............................................64
Consolidated Statements of Financial Condition as of March 31, 1999 and
1998...................................................................65
Consolidated Statements of Income for the Years Ended March 31, 1999,
1998 and 1997..........................................................66
Consolidated Statements of Comprehensive Income for the Years
ended March 31, 1999, 1998 and 1997....................................67
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended March 31, 1999, 1998 and 1997..............................68
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1999, 1998 and 1997..........................................70
Notes to the Consolidated Financial Statements...........................72
62
<PAGE>
June 10, 1999
Report of Management:
To the Stockholders:
The management of First Washington Bancorp, Inc. ("the Company) is responsible
for the preparation, integrity, and fair presentation of its published
financial statements and all other information presented in this annual
report. The financial statements have been prepared in accordance with
generally accepted accounting principles and, as such, include amounts based
on informed judgments and estimates made by management. In the opinion of
management, the financial statements and other information herein present
fairly the financial condition and operations of the Company at the dates
indicated in conformity with generally accepted accounting principles.
Management is responsible for establishing and maintaining an effective
internal control over financial reporting. The internal control system is
augmented by written policies and procedures and by audits performed by an
internal audit staff which reports to the Audit Committee of the Board of
Directors. Internal auditors monitor the operation of the internal control
system and report findings to management and the Audit Committee. When
appropriate, corrective actions are taken to address identified control
deficiencies and other opportunities for improving the system. The Audit
Committee provides oversight to the financial reporting process. There are
inherent limitations in the effectiveness of any system of internal control,
including the possibility of human error and circumvention or overriding of
controls. Accordingly, even an effective internal control system can provide
only reasonable assurance with respect to financial statement preparation.
Further, because of changes in conditions, the effectiveness of an internal
control system may vary over time.
The Audit Committee of the Board of Directors is comprised entirely of outside
directors who are independent of the Bank's management. The Audit Committee is
responsible for recommending to the Board of Directors the selection of
independent auditors. It meets periodically with management, the independent
auditors and the internal auditors to ensure that they are carrying out their
responsibilities. The Committee is also responsible for performing an
oversight role by reviewing and monitoring the financial, accounting, and
auditing procedures of the Bank in addition to reviewing the Bank's financial
reports. The independent auditors and the internal auditors have full and free
access to the Audit Committee, with or without the presence of management, to
discuss the adequacy of the internal control structure for financial reporting
and any other matters which they believe should be brought to the attention of
the Committee.
/s/ Gary Sirmon /s/ D. Allan Roth
Gary Sirmon, Chief Executive Officer D. Allan Roth, Chief Financial Officer
June 10, 1999
Report of the Audit Committee of the Board of Directors
The Audit Committee of the Board of Directors is comprised of all directors
who are not employees of the Company. The Audit Committee has reviewed the
audited financial statements of First Washington Bancorp, Inc. with management
of the Company, including a discussion of the quality of the accounting
principles applied and significant judgments and estimates affecting the
financial statements. The Audit Committee has also discussed with the outside
auditors the auditors' opinion of the quality of those principles and
significant judgments as applied by management in preparation of the financial
statements. In addition, the members of the Audit Committee have discussed
among themselves, without management or the outside auditors present, the
information disclosed to the committee by management and the outside auditors
and have met regularly with the internal audit staff, without management
present, to review compliance with approved policies and procedures. In
reliance on these reviews and discussions, the Audit Committee believes that
the financial statements of First Washington Bancorp, Inc. are fairly
presented in conformity with generally accepted accounting principles in all
material respects.
/s/ Robert D. Adams
Robert D. Adams
Audit Committee Chairman
63
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
First Washington Bancorp, Inc. and Subsidiaries
Walla Walla, Washington
We have audited the accompanying consolidated statements of financial
condition of First Washington Bancorp, Inc. and subsidiaries (the Company) as
of March 31, 1999 and 1998, and the related consolidated statements of income,
comprehensive income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended March 31, 1999. These consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial condition of First Washington Bancorp, Inc.
and subsidiaries as of March 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended March 31, 1999 in conformity with generally accepted accounting
principles.
/s/Deloitte and Touche LLP
DELOITTE & TOUCHE LLP
June 10, 1999
Seattle, Washington
64
<PAGE>
FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except shares)
March 31, 1999 and 1998
ASSETS 1999 1998
---- ----
Cash and due from banks $ 72,503 $ 42,529
Securities available for sale, cost $358,540 and
$298,346 362,021 302,419
Securities held to maturity, fair value $2,235
and $194 2,155 194
Federal Home Loan Bank stock 23,137 16,050
Loans receivable:
Held for sale, fair value $11,256 and $12,436 11,256 12,436
Held for portfolio 1,103,674 752,338
Allowance for loan losses (12,261) (7,857)
---------- ----------
1,102,669 756,917
Accrued interest receivable 9,898 7,569
Real estate held for sale, net 1,439 882
Property and equipment, net 15,960 11,379
Costs in excess of net assets acquired (goodwill),
net 34,182 11,007
Deferred income tax asset, net 758 --
Other assets 7,178 5,126
---------- ----------
$1,631,900 $1,154,072
========== ==========
LIABILITIES
Deposits:
Non-interest-bearing $ 97,062 $ 56,691
Interest-bearing 853,786 545,831
---------- ----------
950,848 602,522
Advances from Federal Home Loan Bank 408,252 297,549
Other borrowings 78,467 91,723
Accrued expenses and other liabilities 7,928 5,475
Deferred compensation 1,691 3,798
Deferred income tax liability, net -- 541
Income taxes payable 1,106 2,280
---------- ----------
1,448,292 1,003,888
STOCKHOLDERS' EQUITY
Preferred stock - $0.01 par value, 500,000
shares authorized, no shares issued -- --
Common stock - $0.01 par value, 27,500,000 shares
authorized, 12,001,562 shares issued: *
11,647,615 shares and 10,948,123 shares outstanding *
at March 31, 1999 and 1998, respectively. 130,770 108,994
Retained earnings 59,958 72,962
Accumulated other comprehensive income:
Unrealized gain (loss) on securities available
for sale 2,296 2,680
Treasury stock, at cost: none and 1,053,439 shares *
at March 31, 1999 (see Note 1) and 1998, respectively -- (20,979)
Unearned shares of common stock issued to Employee
Stock Ownership Plan (ESOP) trust:
745,918 and 787,897 restricted shares outstanding *
at March 31, 1999 and 1998, respectively, at cost (6,781) (7,163)
Carrying value of shares held in trust for stock
related compensation plans (4,785) (6,310)
Liability for common stock issued to deferred, stock
related, compensation plan 2,150 --
---------- ----------
(2,635) (6,310)
---------- ----------
183,608 150,184
---------- ----------
$1,631,900 $1,154,072
========== ==========
*Adjusted for stock dividend: see Note 2.
See notes to consolidated financial statements
65
<PAGE>
FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except for per share data)
For the years ended March 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
INTEREST INCOME:
Loans receivable $ 89,615 $ 64,695 $ 46,549
Mortgage-backed securities 13,025 12,522 12,420
Securities and cash equivalents 9,652 7,930 8,323
--------- --------- ---------
112,292 85,147 67,292
--------- --------- ---------
INTEREST EXPENSE:
Deposits 34,019 25,289 21,736
Federal Home Loan Bank advances 21,430 16,782 12,504
Other borrowings 4,993 4,580 2,132
--------- --------- ---------
60,442 46,651 36,372
--------- --------- ---------
Net interest income before provision
for loan losses 51,850 38,496 30,920
PROVISION FOR LOAN LOSSES 2,841 1,628 1,423
--------- --------- ---------
Net interest income 49,009 36,868 29,497
OTHER OPERATING INCOME:
Loan servicing fees 798 815 746
Other fees and service charges 3,574 2,436 1,532
Gain on sale of loans 2,884 1,377 684
Gain (loss) on sale of securities 11 2 2
Miscellaneous 186 90 106
--------- --------- ---------
Total other operating income 7,453 4,720 3,070
OTHER OPERATING EXPENSES:
Salary and employee benefits 18,644 13,117 10,574
Less capitalized loan origination costs (2,689) (2,069) (1,666)
Occupancy and equipment 4,816 2,983 2,429
Information/computer data services 1,603 1,169 912
Advertising 590 450 415
Savings Association Insurance Fund
(SAIF) special assessment -- -- 2,387
Deposit insurance 338 280 497
Amortization of goodwill 2,389 899 592
Miscellaneous 6,054 4,191 3,190
--------- --------- ---------
Total other operating expenses 31,745 21,020 19,330
--------- --------- ---------
Income before provision for income taxes 24,717 20,568 13,237
PROVISION FOR INCOME TAXES 9,277 7,446 3,923
--------- --------- ---------
NET INCOME $ 15,440 $ 13,122 $ 9,314
========= ========= =========
Earnings per common share: see Notes 2
and 25
Basic $ 1.46 $ 1.30 $ 0.88
Diluted $ 1.40 $ 1.25 $ 0.87
Cumulative dividends declared per
common share $ 0.38 $ 0.27 $ 0.20
See notes to consolidated financial statements
66
<PAGE>
FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
For the years ended March 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
NET INCOME: $ 15,440 $ 13,122 $ 9,314
OTHER COMPREHENSIVE INCOME (LOSS), NET
OF INCOME TAXES:
Unrealized holding gain (loss) during
the period, net of deferred income tax
(benefit) of $(194), $1,588 and $(606) (377) 3,082 (1,176)
Less adjustment for gains included in
net income, net of income tax of $4,
$1 and $1 7 1 1
--------- --------- ---------
Other comprehensive income (loss) (384) 3,081 (1,175)
--------- --------- ---------
COMPREHENSIVE INCOME $ 15,056 $ 16,203 $ 8,139
========= ========= =========
See notes to consolidated financial statements
67
<PAGE>
FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
For the years ended March 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
COMMON STOCK:
Balance, beginning of year $108,994 $107,953 $107,479
Issuance of stock in connection with
acquisitions 12,776 -- --
Assumption of options in connection
with acquisitions 2,546 -- --
Excess of basis over proceeds of stock
reissued for exercised stock options (265) (29) --
Record 10% stock dividend: see Note 2 24,371 -- --
Repurchase and retirement of stock
subsequent to reincorporation (7,926) -- --
Repurchase of forfeited shares,
subsequent to reincorporation (29) -- --
Retirement of treasury stock resulting
from reincorporation in State of
Washington: see Note 1 (11,116) -- --
Release of earned ESOP shares 542 839 417
Issuance of stock to fund stock
related compensation plans 601 -- 57
Recognition of tax benefit related to
release of MRP shares 276 231 --
-------- --------- ---------
Balance, end of year 130,770 108,994 107,953
RETAINED EARNINGS:
Balance, beginning of year 72,962 62,572 55,343
Net income 15,440 13,122 9,314
Record 10% stock dividend (24,371) -- --
Cash dividends (4,073) (2,732) (2,085)
-------- --------- ---------
Balance, end of year 59,958 72,962 62,572
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance, beginning of year 2,680 (401) 774
Other comprehensive income (loss), net
of related income taxes (384) 3,081 (1,175)
-------- --------- ---------
Balance, end of year 2,296 2,680 (401)
TREASURY STOCK:
Balance, beginning of year (20,979) (6,954) --
Issuance of stock in connection with
acquisitions 17,206 -- --
Purchases of treasury stock, prior to
reincorporation (7,340) (13,993) (12,905)
Purchases of treasury stock for
exercised stock options (409) (74) --
Issuance of treasury stock for MRP and/
or exercised stock options 409 74 5,957
Repurchase of forfeited shares from MRP (3) (32) (6)
Retirement of treasury shares resulting
from reincorporation in State of
Washington: see Note 1 11,116 -- -
-------- --------- ---------
Balance, end of year -- (20,979) (6,954)
UNEARNED, RESTRICTED ESOP SHARES AT COST:
Balance, beginning of year (7,163) (7,751) (8,331)
Release of earned ESOP shares 382 588 580
-------- --------- ---------
Balance, end of year (6,781) (7,163) (7,751)
CARRYING VALUE OF SHARES HELD IN TRUST FOR
STOCK RELATED COMPENSATION PLANS:
Balance, beginning of year (6,310) (6,783) (1,123)
Cumulative effect of change in accounting
for Rabbi Trust: see Note 1 1,095 -- --
Stock issued to fund Rabbi Trust plans (601) -- --
Net change in number and/or valuation of
shares held in trust 1,987 (740) (548)
Issuance of treasury stock for MRP -- -- (6,014)
Amortization of compensation related
to MRP 1,194 1,213 902
-------- --------- ---------
Balance, end of year (2,635) (6,310) (6,783)
-------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY $183,608 $ 150,184 $ 148,636
======== ========= =========
See notes to consolidated financial statements
68
<PAGE>
FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
For the years ended March 31, 1999, 1998 and 1997
1999* 1998* 1997*
----- ----- -----
COMMON STOCK, SHARES ISSUED:
Number of shares, beginning of year 12,002 12,002 12,002
------- ------- -------
Number of shares, end of year 12,002 12,002 12,002
------- ------- -------
LESS TREASURY STOCK RETIRED/
REPURCHASED: see Note 1:
Number of shares, beginning of year (1,054) (431) --
Repurchase stock (675) (621) (875)
Repurchase stock for exercised
stock options (18) (3) --
Issuance of stock to deferred compensation
plan and/or exercised stock options 34 3 445
Stock issued in acquisitions 1,361 -- --
Repurchase of stock forfeited from MRP (2) (2) (1)
-------- -------- --------
Shares of stock retired/repurchased,
end of year (354) (1,054) (431)
-------- -------- --------
SHARES OUTSTANDING, END OF YEAR 11,648 10,948 11,571
======== ======== ========
UNEARNED, RESTRICTED ESOP SHARES:
Number of shares, beginning of year (788) (853) (917)
Release of earned shares 42 65 64
-------- -------- --------
Number of shares, end of year (746) (788) (853)
======== ======== ========
* Adjusted for stock dividend: see Note 2.
See notes to consolidated financial statements
69
<PAGE>
FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) FOR THE
Years ended March 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
OPERATING ACTIVITIES:
Net income $15,440 $13,122 $ 9,314
Adjustments to reconcile net income to net
cash provided by operating activities:
Deferred taxes (144) 374 (315)
Depreciation 1,901 1,135 744
Loss (gain) on sale of securities (11) (2) (2)
Net amortization of premiums and
discounts on investments 1,017 287 (595)
Amortization of costs in excess of net
assets acquired 2,389 899 592
Amortization of MRP compensation
liability 1,194 1,213 902
Loss (gain) on disposal of equipment (95) (7) --
Loss (gain) on sale of loans (1,903) (933) (699)
Net change in deferred loan fees,
premiums and discounts 46 523 792
Loss (gain) on disposal of real estate
held for sale 35 30 62
Amortization of mortgage servicing
rights 277 100 72
Capitalization of mortgage servicing
rights from sale of mortgages
with servicing retained (981) (442) --
Provision for loan losses 2,841 1,628 1,423
FHLB stock dividend (1,545) (1,146) (868)
Cash provided (used) in operating assets
and liabilities:
Loans held for sale 3,306 (9,496) 665
Accrued interest receivable (1,111) (619) (335)
Other assets 865 (482) 90
Deferred compensation 380 288 258
Accrued expenses and other liabilities 170 1,038 546
Income taxes payable (1,709) (38) (256)
-------- -------- --------
Net cash provided by operating
activities 22,362 7,472 12,390
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of securities available
for sale (353,354) (233,660) (485,548)
Principal repayments and maturities of
securities available for sale 301,393 221,766 534,177
Sales of securities available for sale 2,637 1,405 769
Principal repayments and maturities of
securities held to maturity 647 793 1,092
Loans originated and closed, net (716,952) (511,398) (270,240)
Purchases of loans and participating
interest in loans (86,165) (51,049) (117,584)
Sales of loans and participating
interest in loans 127,452 81,575 36,942
Principal repayments on loans 521,958 375,868 207,526
Purchases of FHLB stock (3,437) (2,097) (2,909)
Proceeds from sale of property,
equipment and real estate acquired
for development 373 13 5
Purchases of property and equipment (3,067) (1,986) (1,463)
Additional investment in real estate
held for sale, net of insurance proceeds (165) (26) --
Proceeds from sale of real estate held
for sale 2,661 2,417 652
Funds transferred to deferred compensation
plans (494) (91) (94)
Acquisitions, net of cash acquired 13,877 -- (17,289)
-------- -------- --------
Net cash used by investing activities $(192,636) $(116,470) $(113,964)
-------- -------- --------
Continued on next page
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<PAGE>
FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
For the years ended March 31, 1999, 1998 and 1997
(Continued from prior page)
1999 1998 1997
---- ---- ----
FINANCING ACTIVITIES:
Compensation expense recognized for shares
released for allocation to participants of
the ESOP:
Original basis of shares $ 382 $ 588 $ 580
Excess of fair value of released shares
over basis 542 839 417
Increase (decrease) in deposits 129,998 46,645 36,842
Proceeds from FHLB advances 300,807 640,025 600,327
Repayment of FHLB advances (199,099) (573,991) (548,231)
Proceeds from repurchase agreement
borrowings 268 33,687 42,444
Repayment of repurchase agreement
borrowings (13,008) (431) (133)
Cash dividends paid (3,595) (2,583) (1,907)
Increase (decrease) in other borrowings (516) (3,718) (398)
Net cost of exercised stock options (265) (29) --
Repurchases of stock (15,266) (13,993) (12,905)
-------- -------- -------
Net cash provided by financing
activities 200,248 127,039 117,036
-------- -------- -------
NET INCREASE (DECREASE) IN CASH AND DUE
FROM BANKS 29,974 18,041 15,462
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD 42,529 24,488 9,026
-------- -------- -------
CASH AND DUE FROM BANKS, END OF PERIOD $ 72,503 $ 42,529 $24,488
======== ======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $59,407 $ 46,311 $35,744
Taxes paid $10,619 $ 7,108 $ 4,494
Non-cash transactions:
Loans, net of discounts, specific loss
allowances and unearned income trans-
ferred to real estate held for sale $ 3,007 $ 2,246 $ 1,059
Net change in accrued dividends payable $ 477 $ 149 $ 178
Net change in unrealized gain (loss) in
deferred compensation trust and
related liability $ 3,498 $ 707 $ 475
Stock issued to Rabbi Trust/MRP $ 601 $ -- $ 6,014
Stock forfeited by MRP $ 32 $ 32 $ 6
Recognize tax benefit of vested MRP shares $ 276 $ 231 $ --
Fair value of stock issued and options
assumed in connection with the
acquisitions $32,527 $ -- $ --
Non-cash portion of 10% stock dividend $24,360 $ -- $ --
See notes to consolidated financial statements
71
<PAGE>
FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
NOTE 1: REINCORPORATION AND SUMMARY OF ACCOUNTING POLICIES
Reincorporation: The stockholders of First Savings Bank of Washington
Bancorp, Inc., a Delaware corporation and herein referred to as "FSBWB,"
approved the reincorporation of FSBWB from Delaware to Washington on July 24,
1998. The purpose of the reincorporation was to save higher costs incurred as
a result of being a Delaware corporation. The reincorporation was effected
July 24, 1998 by merging FSBWB into a wholly-owned subsidiary which had been
recently formed solely for the purpose of effecting the reincorporation. The
surviving corporation is known as First Washington Bancorp, Inc., a
Washington corporation, and is hereafter referred to as "FWWB" or "the
Company." Upon consummation of the merger, each share of Common Stock of
FSBWB, par value $.01 per share, was automatically converted into one share of
Common Stock of FWWB, par value $.01 per share.
The merger was consummated under the terms and conditions of a Plan of Merger
pursuant to which FSBWB ceased to exist as a Delaware corporation, the
stockholders of FSBWB became shareholders of FWWB, FWWB succeeded to all the
assets, liabilities, subsidiaries and other properties of FSBWB to the full
extent provided by law, and the rights of the shareholders and internal
affairs of FWWB are to be governed by the articles of incorporation and bylaws
of FWWB and the Washington Business Corporation Act, as amended. As a result
of the merger, FWWB has the same recorded basis, business, management, benefit
plans, location, assets, liabilities and net worth as did FSBWB. However,
because the State of Washington treats all treasury stock as retired upon
purchase, all purchases of treasury stock reduce stock issued and the cost of
treasury stock acquired is charged to par value and paid-in capital.
Basis for Presentation: The Company is a bank holding company incorporated in
the State of Washington. The Company was originally organized for the purpose
of acquiring all of the capital stock of First Savings Bank of Washington
(FSBW) upon its reorganization from the mutual holding company form of
organization to the stock holding company form of organization.
The Company is primarily engaged in the business of planning, directing and
coordinating the business activities of its wholly owned subsidiaries, FSBW,
Inland Empire Bank (IEB), and Towne Bank (TB) (together, the Banks). FSBW is a
Washington-chartered savings bank the deposits of which are insured by the
Federal Deposit Insurance Corporation (FDIC) under the Savings Association
Insurance Fund (SAIF). FSBW conducts business from its main office in Walla
Walla, Washington and its sixteen branch offices and three loan production
offices located in southeast, central, north central and western Washington.
FSBW also conducts business through its division, WSB, which has five branch
offices and one loan production office located in northwest Washington in
Bellingham, Washington, and Whatcom and Island counties. IEB is an
Oregon-chartered commercial bank whose deposits are insured by the FDIC under
the Bank Insurance Fund (BIF). IEB conducts business from its main office in
Hermiston, Oregon, and its five branch offices and two loan production offices
located in northeast Oregon. TB operates six full service branches in the
Seattle, Washington, metropolitan area--in Woodinville, Redmond, Bellevue,
Renton, Kirkland and Bothell. The Company's only significant assets are the
capital stock of its subsidiaries, its loan to the Company's Employee Stock
Ownership Plan (ESOP) (see Note 15) and the portion of the net proceeds
retained from the offering. The Company has no significant liabilities.
The Company and its Bank subsidiaries are subject to regulation by the Federal
Reserve Board (FRB) and the FDIC. In addition FSBW, IEB and TB are subject to
the state banking regulations applicable to their state charters.
Nature of Business: The operating results of the Company depend primarily on
its net interest income, which is the difference between interest income on
interest-earning assets, consisting of loans and securities, and interest
expense on interest-bearing liabilities, composed primarily of savings
deposits, Federal Home Loan Bank (FHLB) advances and repurchase agreements.
Net interest income is a function of the Company's interest rate spread, which
is the difference between the yield earned on interest-earning assets and the
rate paid on interest-bearing liabilities, as well as a function of the
average balance of interest-earning assets as compared to the average balance
of interest-bearing liabilities.
72
<PAGE>
In addition to interest income on loans and securities, the Banks receive
other income from deposit service charges, loan origination and servicing fees
and from the sale of loans and investments.
Principles of Consolidation: The consolidated financial statements include the
accounts of FWWB and its wholly owned subsidiaries, FSBW, IEB and TB. All
material intercompany transactions, profits and balances have been eliminated.
Use of Estimates: The preparation of the financial statements in conformity
with generally accepted accounting principles (GAAP) requires management to
make estimates and assumptions that affect amounts reported in the financial
statements. Changes in these estimates and assumptions are considered
reasonably possible and may have a material impact on the financial
statements. The Company has used significant estimates in determining reported
reserves and allowances for loan losses, mortgage servicing rights, goodwill,
tax liabilities and other contingencies.
Securities: Securities are classified as held to maturity when the Company has
the ability and positive intent to hold them to maturity. Securities
classified as available for sale are available for future liquidity
requirements and may be sold prior to maturity.
Securities held to maturity are carried at cost, adjusted for amortization of
premiums and accretion of discounts to maturity. Unrealized losses on
securities held to maturity due to fluctuations in fair value are recognized
when it is determined that an other than temporary decline in value has
occurred. Securities available for sale are carried at fair value. Unrealized
gains and losses on securities available for sale are excluded from earnings
and are reported net of tax as accumulated other comprehensive income, a
component of stockholders' equity, until realized. Realized gains and losses
on sale are computed on the specific identification method and are included in
operations on the trade date sold.
Loans Receivable: The Banks originate mortgage loans for both portfolio
investment and sale in the secondary market. At the time of origination,
mortgage loans are designated as held for sale or held for investment. Loans
held for sale are stated at lower of cost or estimated fair value determined
on an aggregate basis. The Banks also originate commercial, financial,
agribusiness and installment credit loans for portfolio investment. Loans
receivable not designated as held for sale are recorded at the principal
amount outstanding, net of allowance for loan losses, deferred fees,
discounts, and premiums. Premiums, discounts and deferred loan fees are
amortized to maturity using the level-yield methodology.
Interest is accrued as earned unless management doubts the collectibility of
the loan or the unpaid interest. Interest accruals are generally discontinued
when loans become 90 days past due for interest. All previously accrued but
uncollected interest is deducted from interest income upon transfer to
nonaccrual status. Future collection of interest is included in interest
income based upon an assessment of the likelihood that the loans will be
repaid or recovered. A loan may be put in nonaccrual status sooner than this
policy would dictate if, in management's judgment, the loan may be
uncollectible. Such interest is then recognized as income only if it is
ultimately collected.
Costs in Excess of Net Assets Acquired: Costs in excess of net assets acquired
(goodwill) is an intangible asset arising from the purchase of IEB, TB and
WSB. It is being amortized on a straight-line basis over the 14-year period of
expected benefit. The Company periodically evaluates goodwill for impairment.
Mortgage Servicing Rights: Purchased servicing rights represent the cost of
acquiring the right to service mortgage loans. Originated servicing rights are
recorded when mortgage loans are originated and subsequently sold or
securitized with the servicing rights retained. The total cost of mortgage
loans sold is allocated to the servicing rights and the loans (without the
servicing rights) based on relative fair values. The cost relating to
purchased and originated servicing is capitalized and amortized in proportion
to, and over the period of, estimated future net servicing income.
The Banks assess the fair value of unamortized remaining servicing rights for
impairment on a stratum by stratum basis every quarter by using secondary
market quotes for comparable packages of serviced loans and a valuation model
that calculates the present value of future cash flows using market discount
rates and market based assumptions for prepayment speeds, servicing costs and
ancillary income for those pools of serviced mortgages for which secondary
market quotes are not readily available. For purposes of measuring impairment,
the servicing rights are stratified based on their interest rate, original and
remaining terms to maturity and balances outstanding.
73
<PAGE>
In June 1996, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, effective
for transactions occurring after December 31, 1996. SFAS No. 125 superseded
SFAS No. 122, Accounting for Mortgage Servicing Rights, and amended SFAS No.
65, Accounting for Certain Mortgage Banking Activities, to eliminate the
distinction between normal and excess servicing rights. The Banks adopted SFAS
No. 125 on January 1, 1997, and account for their mortgage servicing rights
accordingly. The adoption did not have a material impact.
Allowances for Loan Losses: The adequacy of general and specific reserves is
based on management's continuing evaluation of the pertinent factors
underlying the quality of the loan portfolio, including changes in the size
and composition of the loan portfolio, delinquency rates, actual loan loss
experience and current economic conditions. Large groups of smaller-balance
homogeneous loans are collectively evaluated for impairment. Loans that are
collectively evaluated for impairment by the Banks include residential real
estate and consumer loans. Smaller balance non-homogeneous loans also may be
evaluated collectively for impairment. Larger balance non-homogeneous
residential construction and land, commercial real estate, commercial business
loans and unsecured loans are individually evaluated for impairment. Loans are
considered impaired when, based on current information and events, management
determines that it is probable that the Bank will be unable to collect all
amounts due according to the contractual terms of the loan agreement. Factors
involved in determining impairment include, but are not limited to, the
financial condition of the borrower, value of the underlying collateral and
current status of the economy. Impaired loans are measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's observable market
price or the fair value of collateral if the loan is collateral dependent.
Subsequent changes in the value of impaired loans shall be included within the
provision for loan losses in the same manner in which impairment initially was
recognized or as a reduction in the provision that would otherwise be
reported.
The Company's methodology for assessing the appropriateness of the allowance
consists of several key elements, which include specific allowances, an
allocated formula allowance, and an unallocated allowance. Losses on specific
loans are provided for when the losses are probable and estimable. General
loan loss reserves are established to provide for inherent loan portfolio
risks not specifically provided for. The level of general reserves is based on
analysis of potential exposures existing in the Banks' loan portfolios
including evaluation of historical trends, current market conditions and other
relevant factors identified by management at the time the financial statements
are prepared. The formula allowance is calculated by applying loss factors to
outstanding loans, excluding loans with specific allowances. Loss factors are
based on the Company's historical loss experience adjusted for significant
factors including the experience of other banking organizations that, in
management's judgment, affect the collectibility of the portfolio as of the
evaluation date. The unallocated allowance is based upon management's
evaluation of various factors that are not directly measured in the
determination of the formula and specific allowances. This methodology may
result in losses or recoveries differing significantly from those provided in
the financial statements.
Real Estate Held for Sale: Property acquired by foreclosure or deed in lieu of
foreclosure is recorded at the lower of estimated fair value, less cost to
sell, or the principal balance of the defaulted loan. Development,
improvement, and direct holding costs relating to the property are
capitalized. The carrying value of such property is periodically evaluated by
management and, if necessary, allowances are established to reduce the
carrying value to net realizable value. Gains or losses at the time the
property is sold are charged or credited to operations in the period in which
they are realized. The amounts the Banks will ultimately recover from real
estate held for sale may differ substantially from the carrying value of the
assets because of future market factors beyond the Banks' control or because
of changes in the Banks' strategy for recovering the investment.
Depreciation: The provision for depreciation is based upon the straight-line
method applied to individual assets and groups of assets acquired in the same
year at rates adequate to charge off the related costs over their estimated
useful lives.
Buildings and improvements...............................10-30 years
Furniture and equipment...................................3-10 years
Routine maintenance, repairs, and replacement costs are expensed as incurred.
Expenditures which materially increase values or extend useful lives are
capitalized.
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<PAGE>
Loan Origination and Commitment Fees: Loan origination fees, net of certain
specifically defined direct loan origination costs, are deferred and
recognized as an adjustment of the loans' interest yield using the level-yield
method over the contractual term of each loan adjusted for actual loan
prepayment experience. Net deferred fees or costs related to loans held for
sale are recognized in income at the time the loans are sold. Loan commitment
fees are deferred until the expiration of the commitment period unless
management believes there is a remote likelihood that the underlying
commitment will be exercised, in which case the fees are amortized to fee
income using the straight-line method over the commitment period. If a loan
commitment is exercised, the deferred commitment fee is accounted for in the
same manner as a loan origination fee. Deferred commitment fees associated
with expired commitments are recognized as fee income.
Income Taxes: The Company files a consolidated income tax return including all
of its wholly owned subsidiaries on a calendar year basis. Income taxes are
accounted for using the asset and liability method. Under this method, a
deferred tax asset or liability is determined based on the enacted tax rates
which will be in effect when the differences between the financial statement
carrying amounts and tax bases of existing assets and liabilities are expected
to be reported in the Company's income tax returns. The effect on deferred
taxes of a change in tax rates is recognized in income in the period of
change. Where state income tax laws do not permit consolidated income tax
returns, applicable state income tax returns are filed.
Employee Stock Ownership Plan: The Company sponsors an ESOP. The ESOP
purchased 8% of the shares of common stock issued in the reorganization and
initial public stock offering pursuant to the subscription rights granted
under the ESOP plan. The ESOP borrowed $8,728,500 from the Company in order to
fund the purchase of common stock. The loan to the ESOP will be repaid
principally from the Company's contribution to the ESOP, and the collateral
for the loan is the Company's common stock purchased by the ESOP. As the debt
is repaid, shares are released from collateral based on the proportion of debt
service paid in the year and allocated to participants' accounts. As shares
are released from collateral, compensation expense is recorded equal to the
average current market price of the shares, and the shares become
outstanding for earnings-per-share calculations. Stock and cash dividends on
allocated shares are recorded as a reduction of retained earnings and paid or
distributed directly to participants' accounts. Stock and cash dividends on
unallocated shares are recorded as a reduction of debt and accrued interest
(see additional discussion in Note 15).
Average Balances: Average balances are obtained from the best available daily,
weekly or monthly data, which FWWB's management believes approximate the
average balances calculated on a daily basis.
New Accounting Standards Adopted in These Financial Statements: SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, was issued in June 1996 and established, among other things,
new criteria for determining whether a transfer of financial assets in
exchange for cash or other consideration should be accounted for as a sale or
as a pledge of collateral in a secured borrowing. As issued, SFAS No. 125 was
effective for all transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. In December
1996, FASB issued SFAS No. 127, Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125, which deferred the adoption date of
certain collateral recognition provisions of SFAS No. 125 until January 1,
1998. FWWB adopted the relevant provisions of SFAS No. 125 effective January
1, 1997, and the deferred provisions effective January 1, 1998. There was no
material impact on FWWB's results of operations or financial condition due to
the adoption of these statements.
SFAS No. 130, Reporting Comprehensive Income, was issued in June 1997 and
requires businesses to disclose comprehensive income and its components in
their financial statements. This statement does not affect the results of
operations or financial condition of FWWB or its subsidiaries. FWWB and its
subsidiaries adopted SFAS No. 130 on April 1, 1998.
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, was issued in June 1997 and redefines how operating segments are
determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. This statement does not
affect the results of operations or financial condition of FWWB or its
subsidiaries. SFAS No. 131 was adopted by FWWB and its subsidiaries on April
1, 1998 (see Note 27).
75
<PAGE>
In July 1998, the Emerging Issues Task Force (EITF) of FASB reached a
consensus on the accounting treatment for deferred compensation arrangements
where amounts earned are held in a Rabbi Trust and invested. The consensus
position (EITF 97-14) was applied as of September 30, 1998 for all awards
granted, and existing plans were required to be amended prior to September 30,
1998. Application of the consensus is reflected as a change in accounting
principle under which the Company stock purchased for a Rabbi Trust obligation
and the related liability for deferred compensation are recorded at
acquisition cost. Prior to this change the stock was recorded at fair market
value. The effect of this change in accounting increased equity by $1.1
million and reduced the related liability for deferred compensation by the
same amount.
Recent Accounting Standards Not Yet Adopted: SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, was issued in June 1998 and
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. FWWB will implement this statement on January 1, 2000. The
impact of the adoption of the provisions of this statement on the results of
operations or financial condition of FWWB has not yet been determined.
SFAS No. 134, Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise, was issued in October 1998. Prior to issuance of SFAS No. 134,
when a mortgage banking company securitized mortgage loans held for sale but
did not sell the security in the secondary market, the security was classified
as trading. SFAS No. 134 requires that the security be classified either
trading, available for sale or held to maturity according to the Company's
intent, unless the Company has already committed to sell the security before
or during the securitization process. The statement is effective for all
fiscal years beginning after December 15, 1998. This statement is not expected
to have a material impact on the results of operations or financial condition
of the Company.
Reclassification: Certain amounts in the prior years' financial statements
have been reclassified to conform to the current year's presentation.
NOTE 2: RECENT DEVELOPMENTS AND ACQUISITIONS
Declaration of 10% Stock Dividend:
On July 24, 1998 FWWB's Board of Directors declared a 10% stock dividend
payable August 17, 1998 to shareholders of record on August 10, 1998. All
earnings per share and share data have been adjusted to reflect the 10% stock
dividend.
Acquisition of Towne Bancorp, Inc.:
On April 1, 1998 FWWB completed the acquisition of Towne Bancorp, Inc. FWWB
paid $28.2 million in cash and common stock for all of the outstanding common
shares and stock options of Towne Bancorp, Inc., which was the holding company
for Towne Bank (TB), headquartered in Woodinville, Washington, a Seattle
suburb. As a result of the merger of Towne Bancorp, Inc. into FWWB, TB became
a wholly owned subsidiary of FWWB. The acquisition was accounted for as a
purchase and resulted in the recording of $19.2 million of costs in excess of
the fair value of Towne Bancorp, Inc. net assets acquired (goodwill). Goodwill
assets are being amortized over a 14-year period resulting in a current charge
to earnings of $343,800 per quarter or $1,375,000 per year. Founded in 1991,
TB is a community business bank which had, before recording of goodwill,
approximately $146 million in total assets, $134 million in deposits, $120
million in loans and $9.3 million in shareholders' equity at March 31, 1998.
TB operates six full service branches in the Seattle, Washington, metropolitan
area--in Woodinville, Kirkland, Redmond, Bellevue, Renton and Bothell.
76
<PAGE>
Acquisition of Whatcom State Bancorp, Inc.:
On January 1, 1999 FWWB completed the acquisition of Whatcom State Bancorp,
Inc. FWWB paid $12.1 million in common stock for all the outstanding common
shares and stock options of Whatcom State Bancorp, Inc., which was the holding
company for Whatcom State Bank (WSB), headquartered in Bellingham, Washington.
As a result of the merger of Whatcom State Bancorp, Inc. into FWWB, WSB became
a division of FSBW. The acquisition was accounted for as a purchase and
resulted in the recording of approximately $6.3 million of costs in excess of
the fair value of Whatcom State Bancorp, Inc. net assets acquired (goodwill).
Goodwill assets are being amortized over a 14-year period resulting in a
current charge to earnings of approximately $114,300 per quarter or $457,000
per year. Founded in 1980, WSB is a community commercial bank which had,
before recording of goodwill, approximately $99 million in total assets, $85
million in deposits, $79 million in loans, and $5.4 million in shareholders'
equity at December 31, 1998. WSB operates five full service branches in the
Bellingham, Washington, area Bellingham, Ferndale, Lynden, Blaine and Point
Roberts.
The results of operations of TB and WSB from the completion dates of each
acquisition are included in the financial statements for the year ended March
31, 1999. The following information presents the pro forma results of
operations for the year ended March 31, 1998, as though the acquisitions had
occurred on April 1, 1997. The pro forma results do not necessarily indicate
the actual results that would have been obtained, nor are they necessarily
indicative of the future operations of the combined companies. The pro forma
results for the year ended March 31, 1999 would not materially differ from
actual results as TB has been included for the entire year and the pro forma
results of operations of WSB would not significantly differ from actual
results.
Year ended March 31
Pro Forma (unaudited)
-------------------------------------
(in thousands except per share amounts)
1998
----
Net interest income before
provision for loan loss $50,312
Net income 13,766
Net income per share:
Basic 1.28
Diluted 1.23
Acquisition of Inland Empire Bank:
The Company completed the acquisition of IEB effective August 1, 1996. The
Company paid the former shareholders of IEB $60.8951 per share, in cash, for a
total acquisition price of $32.8 million. The acquisition of IEB was treated
as a purchase for accounting purposes. The assets and liabilities of IEB have
been recorded on the books of the Company at their respective fair market
values at the effective date the acquisition was consummated. Goodwill was
recorded at $12.5 million. Amortization of goodwill over a 14-year period
results in a charge to earnings of approximately $893,000 per year.
Acquisition of Seaport Citizens Bank:
Subsequent to year end, on April 1, 1999 FWWB and FSBW completed the
acquisition of Seaport Citizens Bank (SCB). FSBW paid $10.1 million in cash
for all the outstanding common shares of SCB, which is headquartered in
Lewiston, Idaho. As a result of the merger of SCB into FSBW, SCB became a
division of FSBW. The acquisition will be accounted for as a purchase and
resulted in the recording of approximately $6.2 million of costs in excess of
the fair value of SCB's net assets acquired (goodwill). Goodwill assets will
be amortized over a 14-year period and will result in a current charge to
earnings of approximately $107,200 per quarter, beginning in the first quarter
of fiscal 2000, or $429,000 per year. Founded in 1979, SCB is a commercial
bank which had, before recording of goodwill, approximately $45 million in
total assets, $41 million in deposits, $27 million in loans, and $4.1 million
in shareholders' equity at March 31, 1999. SCB operates two full service
branches in the Lewiston, Idaho, area.
77
<PAGE>
Note 3: CASH AND DUE FROM BANKS
Cash and due from banks consisted of the following (in thousands):
March 31
--------------------
1999 1998
Cash on hand and demand deposits $ 51,126 $ 26,942
Cash equivalents:
Short-term cash investments 2,562 10,342
Federal funds sold 18,815 5,245
-------- --------
$ 72,503 $ 42,529
======== ========
For the purpose of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, overnight investments and short-term
deposits with original maturities less than 90 days.
FRB regulations require depository institutions to maintain certain minimum
reserve balances. Included in cash and demand deposits were reserves required
by the FRB of $6.4 million and $2.8 million at March 31, 1999 and 1998,
respectively.
Note 4: SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair value of securities available for sale
are summarized as follows (in thousands):
March 31, 1999
-------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
U.S. Government and agency
obligations $ 56,477 $ 205 $ (164) $ 56,518
Municipal bonds:
Taxable 2,737 97 (1) 2,833
Tax exempt 30,994 1,338 (73) 32,259
Corporate bonds 24,729 117 (511) 24,335
Mortgage-backed securities:
FHLMC certificates 3,446 63 (7) 3,502
GNMA certificates 22,446 199 (137) 22,508
FNMA certificates 6,823 68 (50) 6,841
Collateralized mortgage
obligations 210,526 619 (1,361) 209,784
FHLMC stock 49 2,971 -- 3,020
FARMERMAC stock 10 27 -- 37
FNMA stock 303 81 -- 384
-------- ------- ------- --------
$358,540 $ 5,785 $(2,304) $362,021
======== ======= ======= ========
Proceeds from sales of securities during fiscal 1999 were $2,637,000. Gross
gains of $11,000 and gross losses of $0 were realized on those sales.
78
<PAGE>
Note 4: SECURITIES AVAILABLE FOR SALE (continued)
At March 31, 1999, the Company's investment portfolio did not contain any
securities of an issuer (other than the U.S. Government and agencies thereof)
which had an aggregate book value in excess of 10% of the Company's
stockholders' equity at that date.
March 31, 1998
-------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
U.S. Government and agency
obligations $ 65,414 $ 232 $ (52) $ 65,594
Municipal bonds, tax exempt 30,607 1,489 (3) 32,093
Corporate bonds 4,279 43 (18) 4,304
Mortgage-backed securities:
FHLMC certificates 3,308 74 (21) 3,361
GNMA certificates 16,499 363 -- 16,862
FNMA certificates 6,010 82 (44) 6,048
Collateralized mortgage
obligations 171,367 1,074 (1,582) 170,859
FHLMC stock 549 2,335 -- 2,884
FARMERMAC stock 10 28 -- 38
FNMA stock 303 73 -- 376
-------- ------- -------- --------
$298,346 $ 5,793 $ (1,720) $302,419
======== ======= ======== ========
Proceeds from sales of securities during fiscal 1998 were $1,405,000. Gross
gains of $1,800 and gross losses of $0 were realized on those sales.
At March 31, 1998, the Company's investment portfolio did not contain any
securities of an issuer (other than the U.S. Government and agencies thereof)
which had an aggregate book value in excess of 10% of the Company's
stockholders' equity at that date.
The amortized cost and estimated fair value of securities available for sale
at March 31, 1999, by contractual maturity, are shown below (in thousands).
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
March 31, 1999
---------------------
Amortized Estimated
cost fair value
---- ----------
Due in one year or less $ 8,575 $ 6,004
Due after one year through five years 58,001 61,102
Due after five years through ten years 37,999 38,687
Due after ten years 253,162 252,787
-------- --------
357,737 358,580
Equity securities 803 3,441
-------- --------
$358,540 $362,021
======== ========
79
<PAGE>
Note 5: SECURITIES HELD TO MATURITY
The amortized cost and estimated fair value of securities held to maturity are
summarized as follows (in thousands):
March 31, 1999
-------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
Municipal bonds tax exempt $ 1,991 $ 81 $ -- $ 2,072
Collateralized mortgage
obligations 164 -- (1) 163
-------- ------ ------- --------
$ 2,155 $ 81 $ (1) $ 2,235
======== ====== ======= ========
March 31, 1998
-------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
Certificates of deposit $ 194 $ -- $ -- $ 194
======== ====== ======= ========
The amortized cost and estimated fair value of securities held to maturity at
March 31, 1999, by contractual maturity, are shown below (in thousands):
March 31, 1999
---------------------
Amortized Estimated
cost fair value
---- ----------
Due in one year or less $ 285 $ 287
Due after one year through five years 1,172 1,215
Due after five years through ten years 434 451
Due after ten years 264 282
------- -------
$ 2,155 $ 2,235
======= =======
Note 6: ADDITIONAL INFORMATION REGARDING COMPOSITION OF SECURITIES AND CASH
EQUIVALENT INTEREST INCOME
The following table sets forth the composition of income from securities and
deposits for the periods indicated (in thousands):
Years ended March 31
------------------------------
1999 1998 1997
Taxable interest income $ 6,069 $ 4,647 $ 5,227
Tax-exempt interest income 1,967 2,031 2,033
Other stock dividend income 71 105 195
Federal Home Loan Bank stock dividend
income 1,545 1,147 868
------- ------- -------
Total securities and cash equivalent
interest income $ 9,652 $ 7,930 $ 8,323
======= ======= =======
80
<PAGE>
Note 7: LOANS RECEIVABLE
Loans receivable at March 31 are summarized as follows (in thousands)
(includes loans held for sale):
1999 1998
One- to four-family real estate loans $ 407,673 $ 423,850
Commercial and multifamily real estate loans 324,858 167,859
Construction and land 217,094 132,409
Commercial 149,943 30,599
Agricultural 46,800 37,052
Consumer, credit card and other 44,346 30,842
---------- ----------
1,190,714 822,571
Less:
Loans in process (71,638) (54,500)
Deferred loan fees, discounts and premiums (4,146) (3,297)
Allowance for loan losses (12,261) (7,857)
---------- ----------
$1,102,669 $ 756,917
========== ==========
Loans serviced for others totaled $268,756,000 and $211,662,000 at March 31,
1999 and 1998, respectively. Custodial accounts maintained in connection with
this servicing totaled $4,088,000 and $4,169,000 at March 31, 1999 and 1998,
respectively.
The Banks' outstanding loan commitments totaled $147,122,000 and $74,087,000
at March 31, 1999 and 1998, respectively. In addition, the Banks had
outstanding commitments to sell loans of $3,791,000 at March 31, 1999.
Loans held for sale at March 31, 1999, and 1998 of $11,256,000 and
$12,436,000, respectively, are stated net of any unrealized losses,
undisbursed loans in process and deferred loan fees.
The amount of impaired loans and the related allocated reserve for loan losses
were as follows (in thousands):
March 31
--------------------------------------------
1999 1998
---- ----
Loan Allocated Loan Allocated
Amount reserves amount reserves
------ -------- ------ --------
Nonaccrual loans $ 3,695 $ 739 $ -- $ --
Other impaired loans -- -- -- --
-------- -------- ------- --------
$ 3,695 $ 739 $ -- $ --
======== ======== ======= ========
The average balance of impaired loans and the related interest income
recognized were as follows:
Years ended March 31
------------------------
1999 1998 1997
---- ---- ----
Average balance of impaired loans $ 622 $ -- $ --
Interest income recognized -- -- --
81
<PAGE>
The Banks originate both adjustable- and fixed-rate loans. At March 31, 1999,
the maturity and repricing composition of those loans, less undisbursed
amounts and deferred fees, were as follows (in thousands):
Fixed-rate (term to maturity):
Less than one year $ 46,727
One to three years 68,728
Three to five years 90,371
Five to ten years 99,937
Over ten years 318,599
--------
$624,362
========
Adjustable-rate (term to rate adjustment):
Less than one year $393,594
One to three years 29,567
Three to five years 58,100
Five to ten years 1,321
Over ten years 7,986
--------
$490,568
========
The adjustable-rate loans have interest rate adjustment limitations and are
generally indexed to the Banks' internal cost of funds, the FHLB's National
Cost of Funds Index and 11th District Cost of Funds, One Year Constant
Maturity Treasury Index, or Prime Rate (The Wall Street Journal). Future
market factors may affect the correlation of the interest rate adjustment with
the rates the Banks pay on the short-term deposits that primarily have been
utilized to fund these loans.
82
<PAGE>
NOTE 8: ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING LOANS
An analysis of the changes in the allowances for loan losses for the three
years ended March 31, 1999 (in thousands) is as follows:
Years ended March 31
----------------------------
1999 1998 1997
---- ---- ----
Balance, beginning of the year $ 7,857 $ 6,748 $ 4,051
Allowances added through business
combinations 2,693 -- 1,416
Provision 2,841 1,628 1,423
Recoveries of loans previously charged off:
Residential real estate -- -- --
Commercial/multifamily real estate 60 6 38
Construction/land -- -- --
Commercial business 143 27 --
Agribusiness 1 2 --
Consumer finance 15 14 8
Credit cards 6 2 7
------ ------- -------
225 51 53
Loans charged off:
Residential real estate (25) (359) (127)
Commercial/multifamily real estate (35) -- --
Construction/land (69) (11) --
Commercial business (911) (19) --
Agribusiness (5) -- (2)
Consumer finance (126) (89) (28)
Credit cards (184) (92) (38)
------ ------- -------
(1,355) (570) (195)
------ ------- -------
Net charge offs (1,130) (519) (142)
------ ------- -------
Balance, end of year $12,261 $ 7,857 $ 6,748
======= ======= =======
83
<PAGE>
The following is a schedule of the Company's allocation of the allowance for
loan losses:
March 31
----------------------------
(in thousands)
1999 1998 1997
---- ---- ----
Specific or allocated loss allowances:
Secured by real estate:
One- to four-family real estate loans $ 2,757 $ 1,059 $ 1,098
Multifamily and commercial 3,567 849 547
Construction 1,597 856 844
Commercial/agricultural 2,522 835 422
Consumer, credit card and other 841 307 237
------- ------- -------
Total allocated 11,284 3,906 3,148
Unallocated 977 3,951 3,600
------- ------- -------
Total allowance for loan losses $12,261 $ 7,857 $ 6,748
======= ======= =======
Ratio of allowance for loan losses
to non-performing loans 1.60 5.53 3.20
Allowance for loan losses as a percent
of net loans (loans receivable
excluding allowance for losses) 1.10% 1.03% 0.94%
The following is a schedule of the Company's non-performing loans:
March 31
----------------------------
(in thousands)
1999 1998 1997
---- ---- ----
Nonaccrual Loans:
One- to four-family real estate loans $3,564 $ 448 $ 1,644
Multifamily real estate 351 -- --
Commercial real estate -- -- 187
Construction 767 367 --
Commercial business 1,392 410 206
Agricultural business 47 4 --
Consumer, credit card and other 17 41 45
------ ------- -------
6,138 1,270 2,082
Loans more than 90 days delinquent,
still on accrual:
One- to four-family real estate loans 20 52 --
Multifamily real estate -- -- --
Commercial real estate 384 33 --
Construction -- 32 --
Commercial business -- -- --
Agricultural business 1,052 -- --
Consumer, credit card and other 82 33 30
------ ------- -------
1,538 150 30
------ ------- -------
Total non-performing loans $7,676 $ 1,420 $ 2,112
====== ======= =======
Non-performing loans to net loans 0.69% 0.19% 0.33%
Loans are normally placed on nonaccrual status when interest is 90 days past
due; however, certain loans with third party guarantees from government
sponsored enterprises or readily accessible cash collateral may remain on an
accrual basis beyond 90 days past due.
84
<PAGE>
NOTE 9: PROPERTY AND EQUIPMENT
Land, buildings and equipment owned by the Company and its subsidiaries at
March 31 are summarized as follows (in thousands):
1999 1998
---- ----
Buildings and leasehold improvements $ 15,260 $ 11,458
Furniture and equipment 12,249 7,508
-------- -------
27,509 18,966
Less accumulated depreciation 13,820 9,786
-------- -------
13,689 9,180
Land 2,271 2,199
-------- --------
$ 15,960 $ 11,379
======== ========
The Company periodically evaluates long-lived assets for impairment in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of.
NOTE 10: DEPOSITS
Customer deposits consist of the following at March 31 (in thousands):
1999 1998
---- ----
Demand, NOW and Money Market accounts,
including non-interest-bearing deposits
in 1999 and 1998 of $97,062 and
$56,691, respectively, 0% to 6% $311,686 $188,831
Regular savings, 2% to 6% 59,133 42,084
Certificate accounts:
2.01% to 4% 6,292 1,338
4.01% to 6% 508,830 299,463
6.01% to 8% 63,617 68,214
8.01% to 10% 1,284 2,587
10.01% to 12% 6 5
-------- ----------
580,029 371,607
-------- ---------
$950,848 602,522
======== =========
Deposits at March 31, 1999 and 1998 include public funds of $48,383,000 and
$14,576,000, respectively. Securities with a carrying value of $9,956,000 and
$9,137,000 were pledged as collateral on these deposits at March 31, 1999 and
1998, respectively, which exceeds the minimum collateral requirements
established by state regulations.
85
<PAGE>
Scheduled maturities of certificate accounts at March 31 are as follows (in
thousands):
1999 1998
---- ----
Due in less than one year $405,306 $240,074
One to two years 93,343 74,519
Two to three years 38,721 13,565
Three to four years 19,621 11,288
Four to five years 13,490 18,652
Over five years 9,548 13,509
-------- --------
$580,029 $371,607
======== ========
Included in deposits are certificates of deposit in excess of $100,000 of
$186,089,000 and $80,608,000 at March 31, 1999 and 1998, respectively.
Interest on certificates in excess of $100,000 totaled $7,568,000, $3,901,000
and $2,945,000 for the years ended March 31, 1999, 1998 and 1997,
respectively.
Deposit interest expense by type for the years ended March 31 is as follows
(in thousands):
1999 1998 1997
---- ---- ----
Certificates $27,407 $20,069 $17,314
Demand, NOW and Money Market accounts 5,256 3,972 3,239
Regular savings 1,356 1,248 1,183
------- ------- -------
$34,019 $25,289 $21,736
======= ======= =======
NOTE 11: ADVANCES FROM FEDERAL HOME LOAN BANK OF SEATTLE
FSBW has entered into borrowing arrangements with the FHLB to borrow funds
under a short-term cash management advance program and long-term loan
agreements. All borrowings are secured by stock of, and cash held by, the
FHLB. Additionally, mortgage loans receivable and securities issued, insured,
or guaranteed by the U.S. Government or agencies thereof are pledged as
security for the loans. At March 31, 1999, FHLB advances were scheduled to
mature as follows (in thousands):
Adjustable-rate Fixed-rate Total
Advances Advances Advances
-------------- ------------- -------------
Rate* Amount Rate* Amount Rate* Amount
----- ------ ----- ------ ----- ------
Due in less than one year 5.20% $ 6,000 5.97% $117,300 5.93% $123,300
One to two years 4.97 3,400 5.60 60,213 5.56 63,613
Two to three years 5.04 1,000 6.09 59,600 6.07 60,600
Three to four years -- -- -- -- -- --
Four to five years -- -- 5.79 59,890 5.79 59,890
Over five years 4.78 12,000 5.49 88,849 5.40 100,849
------- -------- --------
4.93% $22,400 5.79% $385,852 5.74% $408,252
======= ======== ========
* Weighted average interest rate
The maximum and average outstanding balances and average interest rates on
advances from the FHLB were as follows for the year ended March 31 (in
thousands):
1999 1998 1997
---- ---- ----
Maximum outstanding at any month end $410,304 $299,377 $235,098
Average outstanding 363,279 276,328 214,563
Weighted average interest rates:
Annual 5.90% 6.07% 5.83%
End of year 5.74 6.04 5.96
Interest expense during the year $21,430 $16,782 $12,504
86
<PAGE>
NOTE 12: OTHER BORROWINGS
Retail Repurchase Agreements are included in other borrowings. At March 31,
1999, retail repurchase agreements carry interest rates ranging from 3.25% to
7.20%, payable at maturity, and are secured by the pledge of certain FNMA,
GNMA and FHLMC mortgage-backed securities with a fair value of $15,121,000 as
of March 31, 1999.
A summary of retail repurchase agreements at March 31 by the period remaining
to maturity is as follows (in thousands):
1999 1998
---------------- ----------------
Weighted Weighted
average average
rate Balance rate Balance
------- ------- ------- -------
Due in less than one year 4.90% $3,230 5.39% $4,466
Two to three years 5.94 1,455 6.10 738
Three to four years 7.18 1,092 - - - -
Four to five years - - - - 7.18 1,066
Over five years - - - - - - - -
------ ------
5.59% $5,777 5.78% $6,270
====== ======
The maximum and average outstanding balances and average interest rates on
retail repurchase agreements were as follows for the year ended March 31 (in
thousands):
1999 1998 1997
---- ---- ----
Maximum outstanding at any month end $17,300 $10,206 $11,119
Average outstanding 10,404 6,934 11,322
Weighted average interest rates:
Annual 5.61% 5.77% 4.80%
End of year 5.59 5.78 5.76
Interest expense during the year $ 584 $ 400 $ 543
Wholesale Repurchase Agreements: The table below outlines the wholesale
repurchase agreements as of March 31, 1999 and 1998. The agreements to
repurchase are secured by mortgage-backed securities with a fair value of
$75,612,000 at March 31, 1999. The broker holds the security while FSBW
continues to receive the principal and interest payments from the security.
Upon maturity of the agreement the pledged securities will be returned to
FSBW.
A summary of wholesale repurchase agreements at March 31 by the period
remaining to maturity is as follows (in thousands):
1999 1998
----------------- -----------------
Weighted Weighted
average average
rate Balance rate Balance
---- ------- ---- -------
Due in less than one year 5.20% $72,690 5.64% $60,430
One to two years - - - - 5.68 25,000
------- -------
5.20% $72,690 5.65% $85,430
======= =======
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<PAGE>
The maximum and average outstanding balances and average interest rates on
wholesale repurchase agreements were as follows for the year ended March 31
(in thousands):
1999 1998 1997
---- ---- ----
Maximum outstanding at any month end $85,430 $85,430 $52,174
Average outstanding 78,563 72,276 26,649
Weighted average interest rates:
Annual 5.61% 5.78% 5.96%
End of year 5.20 5.65 5.53
Interest expense during the year $ 4,409 $ 4,180 $ 1,589
NOTE 13: INCOME TAXES
Tax law requires that the Company recapture, for federal income tax purposes,
certain of its tax basis bad debt reserves. Such recaptured amounts are to be
generally taken into ordinary income ratably over a four- to six-year period
beginning in fiscal 1999. The Company is recapturing its post-1987 additions
to its tax basis bad debt reserves, which totaled $2.4 million, ratably over a
four- to six-taxable-year period, resulting in approximately $170,000 a year
in federal income taxes (based upon current federal income tax rates). This
will not result in a charge to earnings as these amounts are included in the
deferred tax liability at March 31, 1999.
Retained earnings at March 31, 1999, include $5,318,000 of earnings which
represent pre-1987 federal income tax basis bad debt reserve deductions taken
by FSBW, for which no provisions for federal income taxes have been made. If
the accumulated amount that qualified as deductions for federal income taxes
is later used for purposes other than to absorb bad debt losses or FSBW no
longer qualifies as a bank, the accumulated reserve will be subject to federal
income tax at the then current tax rates.
The provision for income taxes for the years ended March 31 differs from that
computed at the statutory corporate tax rate as follows (in thousands):
1999 1998 1997
---- ---- ----
Taxes at statutory rate $ 8,651 $ 7,199 $ 4,501
Increase (decrease) in taxes:
Tax-exempt interest (597) (620) (608)
Amortization of cost in excess
of assets acquired 822 315 201
Difference in fair market value
versus basis of released ESOP shares 34 328 184
State income taxes net of federal
tax benefit 279 271 148
Other 88 (47) (503)
------ ------ ------
$9,277 $7,446 $3,923
====== ====== ======
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<PAGE>
The provision for income tax expense for the year ended March 31 is composed
of the following (in thousands):
1999 1998 1997
---- ---- ----
Current $9,696 $7,303 $4,238
Deferred (296) 34 (286)
Change in valuation allowance (123) 109 (29)
------ ------ ------
$9,277 $7,446 $3,923
====== ====== ======
Income taxes are provided for the temporary differences between the tax basis
and financial statement carrying amounts of assets and liabilities. Components
of the Company's net deferred tax assets (liabilities) at March 31 consisted
of the following (in thousands):
1999 1998
---- ----
Deferred tax assets:
Loan loss reserves per books $ 4,226 $ 2,675
Deferred compensation and vacation 1,704 1,168
Timing of deductibility of ESOP contributions -- 86
Other 221 150
------ -------
6,151 4,079
Deferred tax liabilities: ------ -------
Change in method of accounting for
amortization of premium and discount
on investments 116 116
Tax basis bad debt reserves--post 1987 606 509
FHLB stock dividends 2,342 1,599
Depreciation 695 638
Deferred loan fees and servicing rights 403 146
Other 34 83
------ -------
4,196 3,091
------ -------
1,955 988
Valuation allowance (13) (136)
------ -------
1,942 852
Income taxes related to valuation reserve
on securities available for sale (1,184) (1,393)
------ -------
Deferred tax asset (liability), net $ 758 $ (541)
====== =======
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<PAGE>
NOTE 14: EMPLOYEE BENEFIT PLANS
The Banks have their own profit sharing plans for all eligible employees. The
plans are funded annually at the discretion of the individual Banks' Boards of
Directors. Contributions charged to operations for the years ended March 31,
1999, 1998 and 1997 were $5,500, $269,000 and $253,000, respectively.
FSBW has entered into a salary continuation agreement with certain of its
senior management. This program was funded by purchasing single premium life
insurance contracts. The program provides for aggregate continued annual
compensation for all participants totaling $240,000 for life with a 15-year
guarantee. Participants vest ratably each plan year until retirement,
termination, death or disability. FSBW is recording the salary obligation over
the estimated remaining service lives of the participants. Expenses related to
this program were $139,000, $129,000 and $119,300 for the years ended March
31, 1999, 1998 and 1997, respectively. The plan's projected benefit obligation
is $2,031,000, of which $438,000 was vested at March 31, 1999. The assumed
discount rate was 7% for 1999 and 1998. At March 31, 1999, an obligation of
$643,400 and cash value of life insurance of $2,252,000 were recorded. At
March 31, 1998, an obligation of $504,600 and cash value of life insurance of
$2,144,500 were recorded. Increases in cash surrender value and related net
earnings from the life insurance contracts partially offset the expenses of
this program resulting in a net cost of $31,000, $21,000 and $15,000 for the
years ended March 31, 1999, 1998 and 1997, respectively.
IEB also has a non-qualified, non-contributory retirement compensation plan
for certain bank employees whose benefits are based upon a percentage of
defined participant compensation. Expenses related to this plan included in
fiscal 1999, 1998 and 1997 operations were $80,000, $54,000 and $27,000,
respectively.
The Company and its subsidiaries also offer non-qualified deferred
compensation plans to members of their Boards of Directors and certain bank
employees. The plans permit each participant to defer a portion of director
fees, non-qualified retirement contributions, salary or bonuses until the
future. Compensation is charged to expense in the period earned. In order to
fund the plans' future obligations the Company has purchased life insurance
polices, contributed to money market investments and purchased common stock of
the Company. As described in Note 1, during fiscal year 1999, the Company
adopted the EITF consensus requiring the Company's stock held in the Rabbi
Trust and resulting obligation be recorded at acquisition cost (fair value at
time of purchase). In addition, the obligation relating to the purchased
shares was reclassified from liabilities to stockholders' equity. As the
Company is the owner of the investments and beneficiary of life insurance
contracts, and in order to reflect the Company's policy to pay benefits equal
to accumulations, the assets and liabilities under the plans are reflected in
the consolidated balance sheets of the Company. Common stock of the Company
held for such plans is reported as a contra-equity account and was recorded at
original cost of $1,912,551 at March 31, 1999. Prior to adoption of the EITF
consensus, common stock of the Company held for such plans was recorded at
fair value of $2,449,000 at March 31, 1998. The money market investments and
cash surrender value of the life insurance policies are included in other
assets.
NOTE 15: EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
The Company established for eligible employees an ESOP and related trust that
became effective upon the former mutual holding company's conversion to a
stock-based holding company. Eligible employees of FSBW as of January 1, 1995
and eligible employees of the Company employed after such date who have been
credited with at least 1,000 hours during a 12-month period will become
participants.
The ESOP borrowed $8,728,500 from the Company in order to purchase the common
stock. The loan will be repaid principally from the Company's contributions to
the ESOP over a period not to exceed twenty five years, and the collateral for
the loan will be the unreleased, restricted common stock purchased by the
ESOP. Contributions to the ESOP will be discretionary; however, the Company
intends to make annual contributions to the ESOP in an aggregate amount at
least equal to the principal and interest requirements of the debt. The
interest rate for the loan is 8.75%.
90
<PAGE>
Participants generally become 100% vested in their ESOP account after seven
years of credited service or if their service was terminated due to death,
early retirement, permanent disability or a change in control. Prior to the
completion of one year of credited service, a participant who terminates
employment for reasons other than death, retirement, disability, or change in
control of the Company will not receive any benefit. Forfeitures will be
reallocated among remaining participating employees in the same proportion as
contributions. Benefits are payable upon death, retirement, early retirement,
disability or separation from service. The contributions to the ESOP are not
fixed, so benefits payable under the ESOP cannot be estimated. ESOP
compensation expense for March 31, 1999, 1998 and 1997 was $924,000,
$1,427,000 and $997,000, respectively.
As of March 31, 1999, the Company has 745,918 unearned, restricted shares
remaining to be released to the ESOP. The fair value of unearned, restricted
shares held by the ESOP trust was $14,499,000 at March 31, 1999.
NOTE 16: STOCK BASED COMPENSATION PLANS AND STOCK OPTIONS
The Company operates the following stock based compensation plans as approved
by the shareholders: the 1996 Management Recognition and Development Plan
(MRP), the 1996 Stock Option Plan and 1998 Stock Option Plan (together, SOPs).
Under the MRP the Company is authorized to grant up to 480,068 shares of
restricted stock to directors, officers and employees of FSBW. The initial
grant of 444,710 shares with a total cost of $6.0 million vests over a
five-year period starting from the July 26, 1996, MRP approval date. The
consolidated statements of income for the years ended March 31, 1999, 1998 and
1997 reflect an accrual of $1,307,000, $1,308,000 and $971,000, respectively,
in compensation expense for the MRP including $113,900, $95,800 and $69,000,
respectively, of expense for dividends on the allocated, restricted stock. A
summary of the changes in the granted, but not vested, MRP shares for the
years ended March 31 follows:
1999* 1998* 1997*
---------- ---------- ---------
Shares granted--not vested,
beginning of year 352,228 444,270 - -
Shares granted--July 26, 1996 - - - - 444,710
Shares vested (88,258) (89,666) - -
Shares forfeited (2,376) (2,374) (440)
---------- --------- --------
Shares granted--not vested, end of year 261,594 352,228 444,270
========== ========= ========
* Adjusted for stock dividend: see Note 2
Under the 1996 and 1998 SOPs the Company has reserved 1,640,169 shares
(adjusted for 10% stock dividend) for issuance pursuant to the exercise of
stock options which may be granted to directors and employees. The exercise
price of the stock options is set at 100% of the fair market value of the
stock price at date of grant. Such options will vest ratably over a five-year
period and any unexercised options will expire ten years after vesting or 90
days after employment or service ends.
91
<PAGE>
<TABLE>
NOTE 16: STOCK BASED COMPENSATION (CONTINUED)
Details of stock options granted, vested, exercised, forfeited or terminated are as follows (adjusted for
10% stock dividend):
Weighted Weighted
average average Number of option shares
fair value at exercise ------------------------------------
date of grant price Total Granted Exercisable
------------- ------ ------- ------- -----------
<S> <C> <C> <C> <C> <C>
For the year ended March 31, 1997:
Options granted $ 4.49 $13.67 1,004,789 1,004,789 --
Options vested -- -- --
Options forfeited -- -- --
Options exercised -- -- --
Options terminated -- -- --
--------- --------- -------
Number of option shares
at March 31, 1997 $13.67 1,004,789 1,004,789 --
--------- --------- -------
For the year ended March 31, 1998:
Options granted $ 9.34 $21.43 19,800 19,800 --
Options vested -- (201,947) 201,947
Options forfeited 14.39 (5,170) (5,170) --
Options exercised 13.86 (3,295) -- (3,295)
Options terminated -- -- --
--------- -------- -------
Number of option shares
at March 31, 1998 $13.83 1,016,124 817,472 198,652
--------- -------- -------
For the year ended March 31, 1999:
Options granted $ 9.88 $23.89 277,112 277,112 --
Options assumed in acquisitions 15.64 6.26 162,810 -- 162,810
Options vested -- (204,368) 204,368
Options forfeited 13.52 (2,817) (2,817) --
Options exercised 7.67 (25,855) -- (25,855)
Options terminated -- -- --
--------- -------- -------
Number of option shares
at March 31, 1999 $ 15.05 1,427,374 887,399 539,975
========= ======== =======
92
</TABLE>
<PAGE>
<TABLE>
NOTE 16: STOCK BASED COMPENSATION (CONTINUED)
Financial data pertaining to outstanding stock options granted at March 31, 1999 were as follows:
Weighted Weighted
average average
exercise exercise Weighted
price Number of Number of price average
of option option option shares of option remaining
Exercise shares shares vested and shares contractual
price granted granted exercisable exercisable life
--------------- ---------- ---------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
$ 1.30 to 11.56 $ 6.47 138,495 138,495 $ 6.47 9.2 yrs
13.52 to 16.82 13.68 992,474 397,520 13.68 8.8 yrs
19.26 to 22.78 21.43 19,800 3,960 21.43 9.3 yrs
19.63 to 24.52 23.88 276,605 -- N/A N/A
--------- -------
1,427,374 539,975
========= =======
</TABLE>
In October 1995, FASB issued SFAS No. 123, Accounting for Stock-based
Compensation. The statement requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not require)
application of the fair value recognition provisions in the statement. SFAS
No. 123 does not rescind or interpret the existing accounting rules for
employee stock-based arrangements. Companies may continue following those
rules to recognize and measure compensation as outlined in Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, but they are now required to disclose the pro forma amounts of net
income and earnings per share that would have been reported had the company
elected to follow the fair value recognition provisions of SFAS No. 123.
Effective April 1, 1996, the Company has determined that it will continue to
measure its employee stock-based compensation arrangements under the
provisions of APB Opinion No. 25. Accordingly, no compensation cost has been
recognized for its stock option plans. Had compensation cost for the Company's
compensation plan been determined consistent with SFAS No. 123, the Company's
net income available to diluted common stock and diluted earnings per share
would have been reduced to the pro forma amounts indicated below:
Years ended March 31
----------------------------
1999 1998 1997
--------- ------- --------
(dollars in thousands,
except per share amounts)
Net income attributable to common stock:
Basic:
As reported $15,440 $ 13,122 $ 9,314
Pro forma 14,113 12,088 8,429
Diluted:
As reported $15,440 $ 13,122 $ 9,314
Pro forma 14,113 12,088 8,429
Net income per common share:
Basic:
As reported $ 1.46 $ 1.30 $ 0.88
Pro forma 1.34 1.19 0.80
Diluted:
As reported $ 1.40 $ 1.25 $ 0.87
Pro forma 1.28 1.15 0.79
The compensation expense included in the pro forma net income attributable to
diluted common stock and diluted earnings per share is not likely to be
representative of the effect on reported net income for future years because
options vest over several years and additional awards generally are made each
year.
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<PAGE>
The fair value of options granted under the Company's stock option plans is
estimated on the date of grant using the Black-Scholes options-pricing model
with the following weighted average assumptions used for grants in fiscal
1999: annual dividend yield of 1.20% to 1.75%, expected volatility of 23.9% to
35.7%, risk-free interest rates of 4.96% to 6.79% and expected lives of 8.5 to
12.5 years.
Note 17: REGULATORY CAPITAL REQUIREMENTS
The Company is a bank holding company registered with the Federal Reserve.
Bank holding companies are subject to capital adequacy requirements of the
Federal Reserve under the Bank Holding Company Act of 1956, as amended (BHCA),
and the regulations of the Federal Reserve. Each of the Banks as
state-chartered federally insured institutions is subject to the capital
requirements established by the FDIC.
The capital adequacy requirements are quantitative measures established by
regulation that require the Company, FSBW, IEB and TB to maintain minimum
amounts and ratios of capital. The Federal Reserve requires the Company to
maintain capital adequacy that generally parallels the FDIC requirements. The
FDIC requires the Banks to maintain minimum ratios of total capital and Tier 1
capital to risk-weighted assets as well as Tier 1 leverage capital to average
assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
created a statutory framework that increased the importance of meeting
applicable capital requirements. For FSBW, IEB and TB, FDICIA established
five capital categories: well-capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. An institution's category depends upon where its capital
levels are in relation to relevant capital measures, which include a
risk-based capital measure, a leverage ratio capital measure, and certain
other factors. The federal banking agencies (including the FDIC) have adopted
regulations that implement this statutory framework. Under these regulations,
an institution is treated as well-capitalized if its ratio of total capital to
risk-weighted assets is 10.00% or more, its ratio of core capital to risk-
weighted assets is 6.00% or more, its ratio of core capital to adjusted total
assets is 5.00% or more and it is not subject to any federal supervisory order
or directive to meet a specific capital level. In order to be adequately
capitalized, an institution must have a total risk-based capital ratio of not
less than 8.00%, a Tier 1 risk-based capital ratio of not less than 4.00%, and
leverage ratio of not less that 4.00%. Any institution which is neither
well-capitalized nor adequately capitalized will be considered
undercapitalized.
Undercapitalized institutions are subject to certain prompt corrective action
requirements, regulatory controls and restrictions which become more extensive
as an institution becomes more severely undercapitalized. Failure by the
Banks, individually, to comply with applicable capital requirements would, if
unremedied, result in restrictions on their activities and lead to enforcement
actions against FSBW, IEB or TB by the FDIC, including, but not limited to,
the issuance of a capital directive to ensure the maintenance of required
capital levels. FDICIA requires the federal banking regulators to take
prompt corrective action with respect to depository institutions that do not
meet minimum capital requirements. Additionally, FDIC approval of any
regulatory application filed for its review may be dependent on compliance
with capital requirements.
Federal law requires that the federal banking agencies' risk-based capital
guidelines take into account various factors including interest rate risk,
concentration of credit risk, risks associated with nontraditional activities,
and the actual performance and expected risk of loss of multifamily mortgages.
In 1994, the federal banking agencies jointly revised their capital standards
to specify that concentration of credit and nontraditional activities are
among the factors that the agencies will consider in evaluating capital
adequacy. In that year, the FDIC amended its risk-based capital standards
with respect to the risk weighting of loans made to finance the purchase or
construction of multifamily residences. Management believes that the effect
of including such an interest rate risk component in the calculation of
risk-adjusted capital will not cause the Company and the Banks to cease to be
well-capitalized. In June 1996, the FDIC and certain other federal banking
agencies issued a joint policy statement providing guidance on prudent
interest rate risk management principles. The agencies stated that they would
determine banks' interest rate risk on a case-by-case basis, and would not
adopt a standardized measure or establish an explicit minimum capital charge
for interest rate risk.
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<PAGE>
NOTE 17: REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
The actual regulatory capital ratios calculated for the Company and the Banks,
along with the minimum capital amounts and ratios for capital adequacy
purposes and to be categorized as well-capitalized under the regulatory
framework for prompt corrective action were as follows:
Minimum to be
categorized as
Minimum "well-capitalized"
for capital under prompt
adequacy corrective action
Actual purposes provisions
--------------- -------------- ---------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(dollars in thousands)
MARCH 31, 1999:
The Company--consolidated
Total capital to risk-
weighted assets $159,221 15.15% $84,063 8.00% N/A N/A
Tier 1 capital to risk-
weighted assets 146,961 13.99 42,032 4.00 N/A N/A
Tier 1 leverage capital
to average assets 146,961 9.44 62,274 4.00 N/A N/A
FSBW
Total capital to risk-
weighted assets 118,576 17.01 55,773 8.00 $69,716 10.00%
Tier 1 capital to risk-
weighted assets 110,161 15.80 27,886 4.00 41,829 6.00
Tier 1 leverage capital
to average assets 110,161 9.41 46,817 4.00 58,521 5.00
IEB
Total capital to risk-
weighted assets 20,165 12.69 12,714 8.00 15,893 10.00
Tier 1 capital to risk-
weighted assets 18,521 11.65 6,357 4.00 9,536 6.00
Tier 1 leverage capital
to average assets 18,521 9.60 7,717 4.00 9,647 5.00
TB
Total capital to risk-
weighted assets 19,450 10.03 15,510 8.00 19,387 10.00
Tier 1 capital to risk-
weighted assets 17,249 8.90 7,755 4.00 11,632 6.00
Tier 1 leverage capital
to average assets 17,249 8.87 7,779 4.00 9,723 5.00
95
<PAGE>
NOTE 17: REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
Minimum to be
categorized as
Minimum "well-capitalized"
for capital under prompt
adequacy corrective action
Actual purposes provisions
--------------- -------------- ---------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(dollars in thousands)
March 31, 1998:
The Company--consolidated
Total capital to risk-
weighted assets $144,284 22.64% $50,987 8.00% N/A N/A
Tier 1 capital to risk-
weighted assets 136,427 21.41 25,493 4.00 N/A N/A
Tier 1 leverage capital
to average assets 136,427 12.17 44,850 4.00 N/A N/A
FSBW
Total capital to risk-
weighted assets 93,324 18.67 40,003 8.00 $50,003 10.00%
Tier 1 capital to risk-
weighted assets 87,073 17.42 20,001 4.00 30,002 6.00
Tier 1 leverage capital
to average assets 87,073 9.30 37,459 4.00 46,824 5.00
IEB
Total capital to risk-
weighted assets 17,545 13.14 10,685 8.00 13,357 10.00
Tier 1 capital to risk-
weighted assets 16,118 12.07 5,343 4.00 8,014 6.00
Tier 1 leverage capital
to average assets 16,118 8.97 7,187 4.00 8,984 5.00
Company management believes that as of March 31, 1999, the Company, FSBW, IEB
and TB individually met all capital adequacy requirements to which they were
subject. Additionally, as of March 31, 1999, the most recent notification from
the FDIC individually categorized the Banks as "well-capitalized" under the
regulatory framework for prompt corrective action. To be categorized as "well-
capitalized," a bank must maintain minimum total risk-based, Tier 1 risk-
based, and Tier 1 leverage ratios as set forth in the table above. There are
no conditions or events since that notification that management believes have
changed any Bank's individual category.
96
<PAGE>
NOTE 18: CONTINGENCIES
In the normal course of business, the Company and/or its subsidiaries have
various legal claims and other contingent matters outstanding. The Company
believes that any liability ultimately arising from these actions would not
have a material adverse effect on the results of operations or consolidated
financial position at March 31, 1999.
NOTE 19: INTEREST RATE RISK
The financial condition and operation of the Company are influenced
significantly by general economic conditions, including the absolute level of
interest rates as well as changes in interest rates and the slope of the yield
curve. The Company's profitability is dependent to a large extent on its net
interest income, which is the difference between the interest received from
its interest-earning assets and the interest expense incurred on its
interest-bearing liabilities.
The activities of the Company, like all financial institutions, inherently
involve the assumption of interest rate risk. Interest rate risk is the risk
that changes in market interest rates will have an adverse impact on the
institution's earnings and underlying economic value. Interest rate risk is
determined by the maturity and repricing characteristics of an institution's
assets, liabilities, and off-balance-sheet contracts. Interest rate risk is
measured by the variability of financial performance and economic value
resulting from changes in interest rates. Interest rate risk is the primary
market risk impacting the Company's financial performance.
The greatest source of interest rate risk to the Company results from the
mismatch of maturities or repricing intervals for rate-sensitive assets,
liabilities and off-balance-sheet contracts. This mismatch or gap is generally
characterized by a substantially shorter maturity structure for
interest-bearing liabilities than interest-earning assets. Additional interest
rate risk results from mismatched repricing indices and formulae (basis risk
and yield curve risk), product caps and floors, and early repayment or
withdrawal provisions (option risk), which may be contractual or market
driven, that are generally more favorable to customers than to the Company.
The Company's primary monitoring tool for assessing interest rate risk is
"asset/liability simulation modeling," which is designed to capture the
dynamics of balance sheet, interest rate and spread movements, and to quantify
variations in net interest income and net market value resulting from those
movements under different rate environments. Another monitoring tool used by
the Company to assess interest rate risk is "gap analysis." The matching of
repricing characteristics of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest
sensitive" and by monitoring the Company's interest sensitivity "gap."
Management is aware of the sources of interest rate risk and in its opinion
actively monitors and manages it to the extent possible, and considers that
the Company's current level of interest rate risk is reasonable.
NOTE 20: GOODWILL
Costs in excess of net assets acquired (goodwill) consisted of the following:
MARCH 31
(in thousands)
1999 1998
-------- ---------
Acquisitions of IEB, TB and WSB, net of
accumulated amortization of $3,880,000
and $1,491,000, respectively $ 34,182 $ 11,007
========= =========
Costs in excess of net assets acquired result from business combinations
accounted for as a purchase of assets and an assumption of liabilities. The
Company's acquisitions of TB and WSB in fiscal 1999 recorded under the
purchase accounting method created $25.6 million of goodwill. Goodwill is
amortized using the straight-line method over the period that is expected to
be benefited of 14 years. The Company periodically evaluates goodwill for
impairment.
97
<PAGE>
NOTE 21: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of SFAS No. 107, Disclosures About
Fair Value of Financial Instruments. The estimated fair value amounts have
been determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgment is
necessary to interpret market data in the development of the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The estimated fair value of financial instruments is as follows at March 31
(in thousands):
1999 1998
----------------------- ---------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
---------- ---------- --------- ----------
Assets:
Cash $ 72,503 $ 72,503 $ 42,529 $ 42,529
Securities available for
sale 362,021 362,021 302,418 302,419
Securities held to maturity 2,155 2,235 194 194
Loans receivable held for
sale 11,256 11,256 12,436 12,436
Loans receivable 1,091,413 1,098,161 744,481 752,420
Accrued interest receivable 9,898 9,898 7,569 7,569
FHLB stock 23,137 23,137 16,050 16,050
Mortgage servicing rights 1,671 1,853 698 836
Liabilities:
Demand, NOW and Money
Market accounts 311,686 311,686 188,831 188,831
Regular savings 59,133 59,133 42,084 42,084
Certificates of deposit 580,029 583,084 371,607 373,635
FHLB advances 408,252 407,553 297,549 299,153
Other borrowings 78,467 78,503 91,723 91,709
Off-balance-sheet financial
instruments:
Commitments to sell loans $ -- $ -- $ -- $ --
Commitments to originate
loans -- -- -- --
Commitments to purchase
securities -- -- -- --
Commitments to sell securities -- -- -- --
98
<PAGE>
Fair value estimates, methods, and assumptions are set forth below for the
Company's financial and off-balance-sheet instruments:
Cash: The carrying amount of these items is a reasonable estimate of their
fair value.
Securities: The estimated fair values of investment securities and mortgaged-
backed securities available for sale and held to maturity are based on quoted
market prices or dealer quotes.
Loans Receivable: Fair values are estimated for portfolios of loans with
similar financial characteristics. Loans are segregated by type such as
multifamily real estate, residential mortgage, nonresidential, commercial/
agricultural, consumer and other. Each loan category is further segmented
into fixed- and adjustable-rate interest terms and by performing and non-
performing categories.
The fair value of performing residential mortgages held for sale is estimated
based upon secondary market sources by type of loan and terms such as fixed or
variable interest rates. For performing loans held in portfolio, the fair
value is based on discounted cash flows using as a discount rate the current
rate offered on similar products.
Fair value for significant non-performing loans is based on recent appraisals
or estimated cash flows discounted using rates commensurate with risk
associated with the estimated cash flows. Assumptions regarding credit risk,
cash flows, and discount rates are judgmentally determined using available
market information and specific borrower information.
FHLB Stock: The fair value is based upon the redemption value of the stock
which equates to its carrying value.
Deposit Liabilities: The fair value of deposits with no stated maturity, such
as savings, checking and NOW accounts, is equal to the amount payable on
demand. The market value of certificates of deposit is based upon the
discounted value of contractual cash flows. The discount rate is determined
using the rates currently offered on comparable instruments.
FHLB Advances and Other Borrowings: The fair value of FHLB advances and other
borrowings is estimated based on discounting the estimated future cash flows
using rates currently available to the Company for debt with similar remaining
maturities.
Commitments: Commitments to sell loans with a notional balance of $3,791,000
and $6,037,000 at March 31, 1999 and 1998, respectively, have a carrying value
of zero, representing the cost of such commitments. Commitments to originate
loans, $147,122,000 and $74,087,000 at March 31, 1999 and 1998, respectively,
also have a carrying value of zero. There were no commitments to purchase or
sell securities at March 31, 1999. The fair value of such commitments is also
estimated to be zero based upon current market rates for similar loans and any
fees received to enter into similar agreements.
Limitations: The fair value estimates presented herein are based on pertinent
information available to management as of March 31, 1999. Although management
is not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for
purposes of these financial statements since that date and, therefore, current
estimates of fair value may differ significantly from the amounts presented
herein.
Fair value estimates are based on existing on- and off-balance-sheet financial
instruments without attempting to estimate the value of anticipated future
business. The fair value has not been estimated for assets and liabilities
that are not considered financial instruments. Significant assets and
liabilities that are not financial instruments include the mortgage banking
operations; deferred tax assets/liabilities; land, buildings and equipment;
costs in excess of net assets acquired; and real estate held for sale.
99
<PAGE>
NOTE 22: FIRST WASHINGTON BANCORP, INC. (FWWB)
(PARENT COMPANY ONLY)
Summary financial information as of March 31 (in thousands):
FWWB
BALANCE SHEETS
March 31, 1999 and 1998
1999 1998
---- ----
ASSETS
Cash $ 110 $ 13,177
Investments available for sale -- 11,978
Loan receivable, ESOP -- 7,414
Investment in subsidiaries 182,578 116,946
Deferred tax asset 273 194
Other assets 2,376 2,120
--------- ---------
$ 185,337 $ 151,829
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ 1,730 $ 1,645
Stockholders' equity 183,607 150,184
--------- ---------
$ 185,337 $ 151,829
========= =========
FWWB
STATEMENTS OF INCOME
For the years ended March 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
INTEREST INCOME:
Certificates and time deposits $ 56 $ 107 $ 62
Investments 401 553 1,403
ESOP loan 325 678 724
------- ------- -------
782 1,338 2,189
OTHER INCOME:
Equity in undistributed income of
subsidiaries 16,010 13,201 8,719
Miscellaneous -- -- 25
------- ------- -------
16,792 14,539 10,933
OTHER EXPENSE 1,653 1,460 1,297
------- ------- -------
15,139 13,079 9,636
PROVISION FOR (BENEFIT FROM) INCOME
TAXES (301) (43) 322
------- ------- -------
NET INCOME $15,440 $13,122 $ 9,314
======= ======= =======
100
<PAGE>
FWWB
STATEMENTS OF CASH FLOWS
For the years ended March 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
OPERATING ACTIVITIES:
Net income $15,440 $ 13,122 $ 9,314
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed earnings
of subsidiaries (16,010) (13,201) (8,719)
Net amortization of investment
discounts (394) (553) (1,403)
Amortization of MRP liability 339 339 254
(Increase) decrease in deferred
taxes -- 101 (230)
(Increase) decrease in other assets 44 (327) (486)
Increase (decrease) in other
liabilities (123) 22 199
------- ------- --------
Net cash provided (used) by
operating activities (704) (497) (1,071)
------- ------- --------
INVESTING ACTIVITIES:
Purchase of securities available
for sale (136,831) (164,686) (446,308)
Principal repayments and maturities
of securities available for sale 149,200 167,290 486,739
Funds transferred to deferred
compensation trust (80) (80) (75)
Acquisitions of subsidiaries (7,824) -- (32,833)
Dividends received from subsidiaries 6,914 26,545 4,515
Payments received on loan to ESOP for
release of shares 633 542 475
Additional investment in subsidiaries (5,730) (216) (166)
Net cash provided (used) by ------- ------- --------
investing activities 6,282 29,395 12,347
------- ------- --------
FINANCING ACTIVITIES:
Repurchases of stock (15,266) (13,993) (12,905)
Repurchase of forfeited MRP shares (32) (38) --
Proceeds from sale of stock to FSBW 250 -- 4,320
Cash dividends paid (3,597) (2,583) (1,907)
------- ------- --------
Net cash provided (used) by
financing activities (18,645) (16,614) (10,492)
------- ------- --------
NET INCREASE (DECREASE) IN CASH (13,067) 12,284 784
CASH, BEGINNING OF PERIOD 13,177 893 109
------- ------- --------
CASH, END OF PERIOD $ 110 $13,177 $ 893
======= ======= ========
101
<PAGE>
FWWB
STATEMENTS OF CASH FLOWS
For the years ended March 31, 1999, 1998 and 1997
(continued)
1999 1998 1997
---- ---- ----
OPERATING ACTIVITIES:
Net income $15,440 $ 13,122 $ 9,314
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $ - - $ - - $ - -
Taxes paid $ - - $ 16 $ 505
Non-cash transactions:
Net change in accrued dividends
payable $ 477 $ 149 $ 178
Increase of investment in
subsidiary for shares released
to ESOP participants as
compensation $ 291 $ 1,642 $ 417
Net change in unrealized gain
(loss) in deferred compensation
trust and related liability,
including subsidiaries $ 5,516 $ 1,536 $ 493
Stock forfeited by MRP,
including subsidiaries $ - - $ 6 $ 6
Recognize tax benefit of vested
MRP shares, including
subsidiaries $ 276 $ 231 $ - -
Fair value of stock issued and
options assumed in connection
with the acquisitions $ 32,527 $ - - $ - -
Non-cash portion of 10% stock
dividend $ 24,360 $ - - $ - -
NOTE 23: CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP
In October 1995, the Company converted from the mutual holding company to the
stock holding company form of organization. At the time, the Company
established a liquidation account in an amount equal to its equity, as
reflected in the latest statement of financial condition used in the final
conversion prospectus. The liquidation account will be maintained for the
benefit of eligible account holders who continue to maintain their accounts at
FSBW after the conversion. The liquidation account will be reduced annually to
the extent that eligible account holders have reduced their qualifying
deposits as of each anniversary date. Subsequent increases will not restore an
eligible account holder's interest in the liquidation account. In the event of
a complete liquidation of the Company, each FSBW eligible account holder will
be entitled to receive a distribution from the liquidation account in an
amount proportionate to the current adjusted qualifying balances for accounts
then held.
Subsequent to the conversion, the Company may not declare or pay cash
dividends on, or repurchase, any of its shares of common stock if the effect
thereof would cause equity to be reduced below applicable regulatory capital
maintenance requirements or if such declaration and payment would otherwise
violate regulatory requirements.
NOTE 24: STOCK REPURCHASE
On November 19, 1996, the Company completed its stock repurchase program
initiated in April 1996 which authorized the repurchase of 600,077 shares of
its outstanding common stock. On November 20, 1996, the Company's Board of
Directors approved continuance of the stock repurchase program authorizing the
purchase of up to 10% of total shares outstanding over the next 12 months.
Similar authorizations were approved by the Board of Directors in November
1997 and October 1998. As of March 31, 1999, the Company has repurchased a
total of 2,188,198 shares at an average price of $19.27 per share. The Company
has reserved 480,067 shares for its MRP of which 439,520 shares were awarded
as of March 31, 1999 (see Note 16 to financial statements). The remaining
40,547 unallocated shares are held as authorized but unissued shares reserved
for the MRP. Management reissued 853,472 shares in connection with the
acquisition of TB, and 507,053 shares in connection with the acquisition of
WSB (see Note 2).
102
<PAGE>
NOTE 25: CALCULATION OF WEIGHTED AVERAGE SHARES OUTSTANDING USED TO CALCULATE
EARNINGS PER SHARE
Years ended March 31
(IN THOUSANDS)
1999* 1998* 1997*
------- --------- --------
Total shares issued 12,002 12,002 12,002
Less stock repurchased/retired
including shares allocated to MRP (681) (1,059) (537)
Less unallocated shares held by the ESOP (772) (824) (891)
------- --------- --------
Basic weighted average shares
outstanding 10,549 10,119 10,574
------- --------- --------
Plus MRP and stock option incremental
shares considered outstanding for
diluted EPS calculations 476 411 139
------- --------- --------
Diluted weighted average shares
outstanding 11,025 10,530 10,713
======= ========= ========
* Weighted average shares, restated for 10% stock dividend
NOTE 26: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Results of operations on a quarterly basis were as follows (in thousands):
YEAR ENDED MARCH 31, 1999
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Interest income $ 25,799 $ 27,676 $ 28,347 $ 30,470
Interest expense 13,940 14,919 15,424 16,159
-------- -------- -------- --------
Net interest income 11,859 12,757 12,923 14,311
Provision for loan losses 667 703 840 631
-------- -------- -------- --------
Net interest income after
provision for loan losses 11,192 12,054 12,083 13,680
Non-interest income 1,593 1,792 1,971 2,097
Non-interest expense 7,073 7,487 7,834 9,351
-------- -------- -------- --------
Income before provision for
income taxes 5,712 6,359 6,220 6,426
Provision for income taxes 2,164 2,392 2,324 2,397
-------- -------- -------- --------
Net operating income $ 3,548 $ 3,967 $ 3,896 $ 4,029
======== ======== ======== ========
* Basic earnings per share $ 0.33 $ 0.38 $ 0.38 $ 0.37
* Diluted earnings per share $ 0.32 $ 0.36 $ 0.36 $ 0.36
* Cash dividends declared $ 0.08 $ 0.09 $ 0.09 $ 0.12
103
<PAGE>
NOTE 26: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED), CONTINUED
Results of operations on a quarterly basis were as follows (in thousands):
YEAR ENDED MARCH 31, 1998
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Interest income $ 20,062 $ 21,311 $ 21,837 $ 21,937
Interest expense 10,721 11,754 12,038 12,138
-------- -------- -------- --------
Net interest income 9,341 9,557 9,799 9,799
Provision for loan losses 355 400 375 498
-------- -------- -------- --------
Net interest income after
provision for loan losses 8,986 9,157 9,424 9,301
Non-interest income 956 1,113 1,249 1,402
Non-interest expense 4,912 5,136 5,517 5,455
-------- -------- -------- --------
Income before provision for
income taxes 5,030 5,134 5,156 5,248
Provision for income taxes 1,785 1,837 1,951 1,873
-------- -------- -------- --------
Net operating income $ 3,245 $ 3,297 $ 3,205 $ 3,375
======== ======== ======== ========
* Basic earnings per share $ 0.32 $ 0.32 $ 0.32 $ 0.34
* Diluted earnings per share $ 0.30 $ 0.31 $ 0.30 $ 0.33
* Cash dividends declared $ 0.06 $ 0.06 $ 0.06 $ 0.08
YEAR ENDED MARCH 31, 1997
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Interest income $ 13,785 $ 16,648 $ 18,264 $ 18,595
Interest expense 7,566 9,007 9,791 10,008
-------- -------- -------- --------
Net interest income 6,219 7,641 8,473 8,587
Provision for loan losses 513 407 231 272
-------- -------- -------- --------
Net interest income after
provision for loan losses 5,706 7,234 8,242 8,315
Non-interest income 435 575 1,173 887
Non-interest expense 2,864 6,842 4,865 4,759
-------- -------- -------- --------
Income before provision for
income taxes 3,277 967 4,550 4,443
Provision for income taxes 884 164 1,444 1,431
-------- -------- -------- --------
Net operating income $ 2,393 $ 803 $ 3,106 $ 3,012
======== ======== ======== ========
* Basic earnings per share $ 0.22 $ 0.08 $ 0.29 $ 0.29
* Diluted earnings per share $ 0.22 $ 0.08 $ 0.29 $ 0.28
* Cash dividends declared $ 0.05 $ 0.05 $ 0.05 $ 0.06
* Restated to reflect 10% stock dividend declared to stockholders of record
as of August 10, 1998.
104
<PAGE>
NOTE 27: BUSINESS SEGMENTS
The Company is managed by legal entity or Bank, not by lines of business. Each
Bank is managed by its executive management team that is responsible for its
own lending, deposit operations, information systems and administration.
Marketing, sales training assistance and credit card administration is
provided from a central source at FSBW, and costs are allocated to the
individual Banks using appropriate methods based on usage. In addition,
corporate overhead and centralized administrative costs are allocated to each
Bank. The accounting policies followed by each Bank are the same as those
described in Note 1 to the Consolidated Financial Statements.
FSBW is a community oriented savings bank which has traditionally offered a
wide variety of deposit products to its retail customers while concentrating
its lending activities on real estate loans. Lending activities have been
focused primarily on the origination of loans secured by one- to four-family
residential dwellings, including an emphasis on loans for construction of
residential dwellings. FSBW's primary business is originating loans for
portfolio in its primary market area, which consists of southeast, central,
north central, and western Washington state. FSBW's wholly owned subsidiary,
Northwest Financial Corporation, provides trustee services for FSBW, is
engaged in real estate sales and receives commissions from the sale of
annuities.
IEB is a community oriented commercial bank chartered in the State of Oregon.
IEB's lending activities consist of granting agribusiness, commercial and
consumer loans to customers throughout the northeastern Oregon region. IEB has
two wholly owned subsidiaries: Pioneer American Property Company, which owns a
building that is leased to IEB, and Inland Securities Corporation, which
previously made a market for IEB's stock but is currently inactive.
TB is a community oriented commercial bank chartered in the State of
Washington. TB's lending activities consist of granting commercial and
consumer loans to customers throughout the Seattle, Washington, metropolitan
area.
The performance of each Bank is reviewed by the Company's executive management
team and the Board of Directors on a monthly basis.
Financial highlights by legal entity were as follows:
YEAR ENDED MARCH 31, 1999
---------------------------------------------------
(dollars in thousands)
CONDENSED INCOME STATEMENT
FSBW IEB TB OTHER* TOTAL
---------- -------- -------- ----- ----------
Net interest income
(loss) $ 30,712 $ 10,114 $ 10,242 $ 782 $ 51,850
Provision for loan losses 1,870 226 745 -- 2,841
Other income 3,875 2,528 1,071 (21) 7,453
Other expenses 16,049 6,841 7,223 1,632 31,745
---------- -------- -------- ------ ----------
Income (loss) before
income taxes 16,668 5,575 3,345 (871) 24,717
Income taxes (benefit) 5,442 2,490 1,646 (301) 9,277
---------- -------- -------- ------ ----------
Net income (loss) $ 11,226 $ 3,085 $ 1,699 $ (570) $ 15,440
========== ======== ======== ====== ==========
MARCH 31, 1999
--------------------------------------------------
TOTAL ASSETS $1,193,269 $204,539 $233,485 $ 607 $1,631,900
========== ======== ======== ====== ==========
105
<PAGE>
NOTE 27: BUSINESS SEGMENTS (CONTINUED)
YEAR ENDED MARCH 31, 1998
---------------------------------------------------
(dollars in thousands)
CONDENSED INCOME STATEMENT
FSBW IEB TB OTHER* TOTAL
---------- -------- -------- ----- ----------
Net interest income
(loss) $ 27,417 $ 9,741 $ N/A $1,338 $ 38,496
Provision for loan
losses 1,559 69 -- 1,628
Other income 2,556 2,164 -- 4,720
Other expenses 13,163 6,397 1,460 21,020
---------- -------- ----- ----------
Income (loss) before
income taxes 15,251 5,439 (122) 20,568
Income taxes (benefit) 5,098 2,391 (43) 7,446
---------- -------- ----- ----------
Net income (loss) $ 10,153 $ 3,048 $ (79) $ 13,122
========== ======== ===== ==========
MARCH 31, 1998
--------------------------------------------------
TOTAL ASSETS $ 952,644 $183,321 $ N/A $18,107 $1,154,072
========== ======== ======= ======= ==========
YEAR ENDED MARCH 31, 1997
---------------------------------------------------
(dollars in thousands)
CONDENSED INCOME STATEMENT
FSBW IEB TB OTHER* TOTAL
---------- -------- -------- ----- ----------
Net interest income
(loss) $ 23,073 $ 5,659 $ N/A $ 2,188 $ 30,920
Provision for loan
losses 1,399 24 -- 1,423
Other income 1,751 1,293 26 3,070
Other expenses 13,874 4,159 1,297 19,330
---------- -------- ------- ----------
Income (loss) before
income taxes 9,551 2,769 917 13,237
Income taxes (benefit) 2,373 1,228 322 3,923
---------- -------- ----- ----------
Net income (loss) $ 7,178 $ 1,541 $ 595 $ 9,314
========== ======== ===== ==========
MARCH 31, 1997
--------------------------------------------------
TOTAL ASSETS $ 813,800 $179,478 $ N/A $14,355 $1,007,633
========== ======== ======= ======= ==========
* Includes intercompany eliminations and holding company amounts.
106
<PAGE>
FIRST WASHINGTON BANCORP, INC.
INDEX OF EXHIBITS
EXHIBIT
- ------------------------------------------------------------------------------
3{a} Certificate of Incorporation of Registrant [incorporated by reference to
Registration Statement on Form S-1, as amended (File No. 33-93386)].
3{b} Bylaws of Registrant [incorporated by reference to exhibits filed with
the Quarterly Report on Form 10-Q for the quarter ended December 31,
1997 (file No. 0-26584)].
10{a} Employment Agreement with Gary L. Sirmon [incorporated by reference to
exhibits filed with the Annual Report on Form 10-k dated March 31, 1996
(File No. 0-26584)].
10{b} Executive Salary Continuation Agreement with Gary L. Sirmon
[incorporated by reference to exhibits filed with the Annual Report on
Form 10-k dated March 31, 1996 (File No. 0-26584)].
10{c} Employment Agreement with D. Allan Roth [incorporated by reference to
exhibits filed with the Annual Report on Form 10-k dated March 31, 1996
(File No. 0-26584)].
10{d} Executive Salary Continuation Agreement with D. Allan Roth [incorporated
by reference to exhibits filed with the Annual Report on Form 10-k
dated March 31, 1996 (File No. 0-26584)].
10{e} Employment Agreement with Michael K. Larsen [incorporated by reference
to exhibits filed with the Annual Report on Form 10-k dated March 31,
1996 (File No. 0-26584)].
10{f} Executive Salary Continuation Agreement with Michael K. Larsen.
[incorporated by reference to exhibits filed with the Annual Report on
Form 10-k dated March 31, 1996 (File No. 0-26584)].
10{g} 1996 Stock Option Plan (incorporated by reference to Exhibit A to the
Proxy Statement for the Annual Meeting of Stockholders held on July 26,
1996).
10{h} 1996 Management Recognition and Development Plan (incorporated by
reference to Exhibit B to the Proxy Statement for the Annual Meeting of
Stockholders held on July 26, 1996).
10{i} Employment and Non-competition Agreement with Jesse G. Foster
[incorporated by reference to exhibits filed with the Annual Report on
Form 10-K dated March 31, 1997 (file No. 0-26584)].
10{j} Supplemental Retirement Plan as Amended with Jesse G. Foster
[incorporated by reference to exhibits filed with the Annual Report on
Form 10-K dated March 31, 1997 (file No. 0-26584)].
10{k} Towne Bank of Woodinville 1992 Stock Option Plan [incorporated by
reference to exhibits filed with the Registration Statement on Form S-8
dated April 2, 1999 (file No. 333-49193)].
21 Subsidiaries of the Registrant.
23 Independent Auditors Consent.
27 Financial Data Schedule.
107
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Parent
- ------
First Washington Bancorp, Inc.
Percentage of Jurisdiction of
Subsidiaries ownership State of Incorporation
- ------------ ------------- ----------------------
First Savings Bank of
Washington (1) 100% Washington
Inland Empire Bank (1) 100% Oregon
Towne Bank (1) 100% Washington
Northwest Financial
Corporation (2) 100% Washington
Pioneer American Property
Company (3) 100% Oregon
- ------------
(1) Wholly-owned by First Washington Bancorp, Inc.
(2) Wholly-owned by First Savings Bank of Washington
(3) Wholly-owned by Inland Empire Bank
<PAGE>
EXHIBIT 23
[Deloitte & Touche LLP Letterhead]
INDEPENDENT AUDITORS' CONSENT
- -----------------------------
We consent to the incorporation by reference in Registration Statement Nos.
333-10819, 333-49193 and 333-71625 of First Washington Bancorp, Inc. on Form
S-8 of our report dated June 10, 1999, appearing in the Annual Report on Form
10-K of First Washington Bancorp, Inc. for the year ended March 31, 1999.
/s/Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Seattle, Washington
June 29, 1999
<PAGE>
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<NAME> FIRST WASHINGTON BANCORP EXHIBIT 27
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